梅西百貨 (M) 2015 Q4 法說會逐字稿

Good morning and welcome to Macy's, Inc.

fourth-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.

Good morning and welcome to the Macy's call scheduled to discuss our fourth-quarter and full-year 2015 earnings.

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 recent Form 10-K and other SEC filings.

As we announced in early January, we had a disappointing November-December.

Fortunately, with the cold weather in the new year, business did improve in January and we did better than expected at the time of our January announcement, and earnings were stronger as a result.

Comp owned plus licensed sales declined 4.3% in the fourth quarter and 2.5% for the full year.

EPS, on a diluted basis, excluding store closing and restructuring-related charges for the quarter, was $2.09 as compared to our most recent guidance of $1.85 to $1.90.

And for the full year, EPS on that same basis was a $3.77, down 14% from last year.

During the fourth quarter, we launched, through our advisers, the marketing of potential partnership and joint venture transactions for our real estate, both our mall-based stores and our four flagship stores.

The demand has been very strong, which is encouraging.

But it is premature to comment further at this point.

I will now talk about our performance in the quarter and highlight some of the bright spots in an otherwise weak quarter and year.

I will then talk about our outlook for the next few years, as well as provide guidance on our key planning assumptions for 2016.

So let's start with the fourth quarter.

Sales in the quarter were $8.9 billion, down 5.3% from last year.

And as I said a minute ago, on a comp owned plus license basis, sales were down 4.3%.

Similar to the third quarter, we had approximately a 4% decline in the number of transactions, a 1% decrease in the average unit retail.

And units per transaction were up about 1%.

We've talked about overall weakness in our sales, and particular weakness in the cold weather businesses.

But we did have some categories that performed quite well in the quarter: cosmetics, fragrances, furniture and mattresses, as well as active.

Geographically, our business was strongest in the West, where weather was less of a factor.

This was true both in-store and online.

Overall, in our digital business continued on a very strong pace.

Digital continues to grow rapidly for purchasing, but it is also becoming even more important for browsing and researching.

Best of all, for us as an omnichannel retailer, customers are increasingly going back and forth between digital devices and stores.

We continued to make progress this year on improving on mobile technology as well as optimizing fulfillment capabilities in the stores, including utilizing our BOPs -- or buying online, pick up in-store -- as a great way to satisfy demand.

Unfortunately, the decline in international tourist sales did not lessen during the fourth quarter and hurt our comp performance by approximately 1 point.

This was less of an impact than experienced in the third quarter, but that is because international tourism is less important for us in the holiday period.

Bloomingdale's had a more challenging quarter than Macy's, largely due to a geographic mix of locations, with even heavier concentrations of tourist doors.

And for Bloomingdale's, too, the digital growth was strong.

Gross margin rate in the fourth quarter was 37.4%, down 290 basis points from last year.

At the start of the quarter, you will remember that we expected a lower than last year gross margin rate.

However, our actual rate was worse than expected as a result of the weak holiday sales and our desire to start 2016 with the right inventory level.

We were pleased that we ended the year with our inventory up 1.6%, or on a comp basis, up 0.7%.

We took the needed markdowns to make sure that we both cleared seasonal goods and priced what was left properly for February-March selling.

For the year as a whole, the gross margin rate dropped 90 basis points versus the prior year.

SG&A in the quarter was $2.2 billion, down 5% from last year; and as a percent of sales, SG&A was flat to last year.

Included in the SG&A were asset sale gains of approximately $114 million.

This compares to $36 million last year.

Included in this number is $84 million associated with the Brooklyn transaction, $18 million for the sale of one of our Mission Valley stores in San Diego, and approximately $12 million in other miscellaneous asset sale gains.

Credit income was $280 million in the quarter, up approximately $40 million over last year.

As we transitioned to our new credit system platform in the fall of 2015, we benefited from stronger-than-expected portfolio yields.

Going forward, we are closely monitoring a rise in delinquency levels that could generate some increase in losses in 2016, as I will discuss later.

SG&A in the quarter also benefited from lower incentive compensation accruals, and our flexing of expense with the lower sales.

So the impact of the real estate transactions, stronger-than-expected credit results, and other expense reductions enabled us to more than offset the increases in other expense areas and our investments in growth.

Depreciation and amortization in the quarter was $270 million, or $4 million higher than a year ago.

Operating income, excluding store closing and restructuring-related charges, was $1.1 billion, down 23% from last year.

And as a percent to sales, operating and EBIT on this basis was 12.6%, down from 15.5% last year.

In the quarter, we booked $177 million of charges associated with store closings and restructuring.

$37 million of this was for additional non-cash asset impairment.

Interest expense in the quarter was $93 million.

Booked tax expense was $300 million, or 35.6% of pre-tax income.

On an annual basis, our effective tax rate was 36.2%, flat with last year.

This is a little better than expected, primarily due to state tax settlements.

The net loss attributable to the non-controlling interest, which is related to our China joint venture, was $1 million.

Let me remind you how the accounting for China works.

As you know, we own 65% of the venture.

But we consolidate their financials and include 100% of the sales, margin, expense, et cetera, in our statements.

So, on the P&L, we then break out the portion of the net income -- or in this case, loss -- which Macy's does not own, on this line.

Net income attributable to Macy's in the quarter was $544 million, or $659 million, excluding store closing and restructuring costs.

This compares to last year's $793 million or $857 million, excluding similar charges, and last year's make-whole premium for the early retirement of debt.

Diluted share count was 314.8 million shares in the quarter, which is 10% lower than a year ago, due to the $2 billion of stock repurchased during fiscal 2015.

Earnings per share on a diluted basis was $1.73, or $2.09 excluding store closings and restructuring charges.

And this compares to $2.44 last year on the same basis.

Cash flow from operating activities, net of investing activities in 2015, was still $892 million, even in a disappointing year.

Net cash provided by operating activities in 2015 was just short of $2 billion, $725 million below last year.

This was due primarily to lower net income.

And net cash use from investing activities was $1.1 billion, $122 million higher than last year.

But it would have been $90 million lower, excluding the Bluemercury acquisition.

As a result of the EBITDA decline, our leverage ratio increased from 2.6 times last year to 3.0 times this year, assuming the same 9.3 times factor for rent capitalization, and excluding the debt issued in the fourth quarter, which was raised to pay off 2016 maturities.

This is higher than our target range of 2.5 to 2.8 times.

As our EBITDA returns to levels achieved in recent years, we expect to get this ratio back into the target range.

So let's move on to the future.

As Terry keeps telling our team, a setback is the setup for a comeback, and we are all focused on learning from 2015 to improve our results in 2016 and beyond.

Our long-term goals for financial performance remain unchanged.

We are still focused on achieving an annual comp sales increase of at least 2%, with an EBITDA rate of 14%, and an ROIC of 22%, both of which we achieved in 2014.

This will not happen all in one year, but we do hope that we are turning the corner as we start the new year.

And while 2015 was disappointing, we did pilot some initiatives that are expected to help us in 2016 and beyond.

I will mention just five of them.

One, jewelry: as you know, we tested a new approach to our fine jewelry and watch business in 2015.

It involves strengthening selling skills, including changes needed to talent, training, and compensation; also included improved associate availability, more direct supervision, and a higher-quality product offering.

Fine jewelry serves as a backbone to our wedding initiative, and based on the success of the pilot we are rolling this approach out across the country.

300 of our stores will be live this fall, and the balance of our stores a year later.

Number two, Last Act and Backstage: as an outgrowth of our research behind the pilot of our off-price concept, as you know called Backstage, we decided to test a simplified pricing approach for clearance in our apparel areas in the Macy's stores.

We took deeper price reductions on our second and third markdowns, but then excluded these goods from coupons and additional discounts.

We also moved these goods to separate spaces on our apparel floors, generally one in the men's, and one in the women's areas.

Customer reaction was very positive.

Sales were higher, sell thru faster, and gross margin higher, with very few complaints from customers about not being able to use coupons.

Based on this successful test, we have already rolled this out to all of our Macy's stores.

We also opened our six pilot Backstage stores this past fall.

We continue to learn from these stores, and plan to continue our testing in 2016.

In addition to these freestanding stores, plus one more that we will be opening in 2016, we will be testing putting Backstage stores within approximately 15 Macy's locations.

We believe this could be an exciting way to drive traffic to our Macy doors, and to offer some price points and categories -- for example, home decor or baby gear, toys, et cetera -- that we don't currently carry at Macy's.

The third initiative is our Top Door strategy.

We began executing this fall a strategy to accelerate and drive further growth in our top 150 locations.

We are working to improve all aspects of these stores, from product to presentation to customer service to special events.

We want to give customers more reasons to come to these stores that are located in the best malls and freestanding locations in the country.

Four is Bluemercury.

Bluemercury has been part of the Macy's family for just under a year.

We have opened 15 new stores in 2015 after the deal closed, including eight in markets where we either had no or limited market share before.

This brought the total number of locations to 77.

We also opened our first four stores within Macy's.

These shops bring to our Macy's customers new brands as well as new services.

We are very excited about these.

We are also including the Bluemercury team, along with Macy's and Bloomingdale's, to strategize how to maximize the Company's digital offering in beauty.

As you know, we are very focused on this category as one of the Company's significant growth opportunities, and we are happy having Bluemercury as part of our strategy.

And fifth is mobile.

Mobile is a major priority for the Company.

Sales on mobile devices more than doubled in 2015, fueled by large increases in both traffic and also conversion.

It is the fastest-growing digital channel.

We think mobile first, and are very focused on making both customer-facing enhancements and also improvements in functionality that will ultimately further improve the customer experience.

We believe all five of these initiatives that I just talked about will help performance in 2016, but are likely to have a bigger impact in 2017 and beyond.

We are very focused on improving our execution in 2016, and at the same time, we are evolving our M.O.M.

strategy to meet the needs of our changing customer and competitive environment.

I will talk about what we call M.O.M.

2.0 in a few minutes, but let me first summarize our key planning assumptions for 2016.

We are assuming that our comp sales, on an owned plus licensed basis, will decline approximately 1% in 2016.

And with the impact of the store closures, this would lead to a total sales decline of approximately 2%.

It isn't, though, until the fourth quarter that we expect our comp owned plus licensed sales to turn positive.

We believe this to be the prudent assumption, given the environment and our performance heading into the year.

We view this year to be one of resetting and rebuilding.

We are still expecting a modest increase in our EBITDA rate as a percent of sales in 2016, as we stated in our press release on January 6. This is assumed to be driven by an increase in our gross margin rate, although we don't expect the gross margin rate will get all the way back to the level achieved in 2014 all in one year.

Expense dollars are expect to be flattish to the 2015 level, and as a result of the sales decline, the rate as a percent to sales is assumed to increase.

We have implemented the previously announced restructuring, and we have taken the other actions that will reduce expense by approximately the $400 million in 2016.

These actions that have been taken will enable us to offset increases in wages as well as the investments we are making to enhance our growth in the areas mentioned, such as digital, Top Doors, Bluemercury, Backstage, and China.

Included in the SG&A guidance are asset sale gains of approximately $235 million, including an estimated $86 million of the gain for Brooklyn.

The remainder of the Brooklyn gain is expected to be booked in 2017.

The gain for Brooklyn will be booked quarterly based on the amount of construction we complete each quarter.

We anticipate that about a quarter of that expected gain of the $86 million will be booked in the first half of the year, with the other -- our remainder in the back half of the year.

But please note that it could change by quarter and even by year, based on the construction schedule.

We are also assuming approximately $150 million for gains from other asset sales.

We are not including in our guidance, though, any impact from the potential transactions related to Herald Square, Union Square, downtown Minneapolis, downtown Chicago, or if we do a more comprehensive joint venture structure for the mall stores.

Credit profitability is expected to decline slightly in 2016 from 2015, as sales decline and the profitability of our portfolio stabilizes at a historic high rate, or possibly declines slightly with higher interest rates and potentially higher delinquency trends.

Retirement-related expense is assumed to decline by approximately $25 million in 2016, due primarily to a change to using the full yield curve approach to estimate the service and interest costs.

Depreciation and amortization is assumed at approximately $1.070 billion based on our capital budget of $900 million for 2016.

Interest expense is assumed at approximately $365 million.

And our assumption for the net loss attributable to non-controlling interest is approximately $10 million in 2016, but know that this is hard to estimate.

Our assumed effective tax rate is 37%.

So with all of these assumptions, our diluted EPS guidance is $3.80 to $3.90 as compared to the $3.77 for 2015.

As you model earnings per share by quarter, the first and third quarters are assumed to be, with these assumptions, below 2015 levels.

As I said earlier, comp sales are expected to be below a year ago in the first nine months of the year.

Also, gross margin rate is assumed to decline in the first and third quarters: in the first, because of the lingering impact of the tough fourth quarter; and in the third quarter, because of the strong 2015 performance.

Also, asset sale gains are expected to be lower than 2015 in these quarters, although that easily could change based on the timing of transactions.

We assume that the earnings growth in the second and fourth quarters will more than offset the declines in the first and third quarters, so that as you could tell from our guidance for the full year, earnings per share would exceed 2015.

One more item to mention.

In 2016, we are expecting that settlement accounting relating to our retirement plans will begin to apply.

This is not included in our guidance, and will be broken out as a separate line item on our P&L.

This occurs in a year when lump sum payments associated with our retirement plans exceed a materiality threshold equal to the sum of the planned service costs and interest costs.

If this threshold is exceeded, there is a non-cash charge that recognizes a portion of the plan's deferred unrecognized losses.

Recognition begins in the quarter in which the threshold is crossed, and then continues for the remainder of the year.

Freezing our plans has lowered this threshold materially.

We are assuming that we will exceed the threshold this year due to store closings, our voluntary separation program, restructurings, and small balance force-outs, in addition to our regular distribution activity.

Our current estimate is that we will have a charge in fiscal 2016 of approximately $135 million for the year, with approximately $15 million booked in the first half of the year, and the remaining in the back half of the year.

As I said earlier, these non-cash charges are not included in guidance, but I didn't want you to be surprised when you see this new line item on our P&L as we go through 2016.

We also hope that by year-end we will have executed some real estate transactions.

But as I said earlier, it is impossible to predict what will be done, when it will be done, or what the financial benefit will be.

And as I mentioned earlier, these transactions are not included in our guidance.

So, while we are all disappointed about 2015, the team here is energized about improving the Company's sales and earnings trends in 2016 as a foundation for growth in the years ahead.

We are a very competitive team, and no one is thrilled about how 2015 turned out, even if some of the factors of downward pressure were out of our control.

And as I quoted Terry earlier, we are all believing that a setback is a setup for a comeback.

Recently about 600 senior executives, including all of the Macy's district and regional store leaders, as well as the heads of technology, digital, merchandising, planning, marketing, and support organizations, met to hear how we have refined our business strategy going into 2016.

The presentation centered on M.O.M., which continues to be our guide.

We are evolving the meaning of M.O.M.

to coincide with where the customers heading.

My Macy's is migrating from a focus on localization to one of personalization.

Omnichannel today means providing Omni Choices for our customers, in stores and digital, especially mobile.

And Magic Selling is shifting focus to new techniques for building Magic Connections with shoppers.

Under these redefined M.O.M.

strategies, we have defined very specific initiatives for the future, each driven by a team of high-performing and creative executives.

They are grouped into five buckets: one, acquire new customers and deepen loyalty; two, win with distinctive product; three, push the digital frontier; four, expand through new formats; and, five, create signature experiences.

The response to this refreshed direction among our senior team was very enthusiastic.

They can see that we are driving our Company to where the puck is headed, not to where it is or used to be.

We are thinking ahead, and are confident we can return to the profitable growth trajectory we saw in the six years prior to 2015, and to the 14% EBITDA rate we posted in 2014.

Our primary focus today is on growing what we might call our core omnichannel business.

And, meanwhile, we are taking the early steps -- testing and learning -- toward longer-term growth vehicles, including off-price and international.

We think you will continue to find that Macy's, Inc.

is a company to watch, and that we are evolving as we position ourselves to be the customer's first choice for fashion, value, and convenience in the years and decades ahead.

Thanks for your interest, and now I will take your questions.

(Operator Instructions).

Jeff Stein, Northcoast Research.

Wondering, as you look back on the fourth quarter, what factors in the Company's view contributed to the substandard performance relative to your peer group?

And what, if any, changes are you making to your merchandising strategy as you look to spring of 2016?

Then I've got one follow-up.

Well, I think part of the fourth quarter relates to our locations being more heavily skewed towards cold weather areas where there wasn't cold weather, and also our heavy reliance on tourist markets.

So I think some of it is a mix issue as opposed to our performance.

But having said that, as you know, we are taking responsibility for some of the performance, and clearly changing things as we go forward.

I would say, from a merchandising approach as we look forward, I think we've talked about some of what we're doing vis-a-vis product.

I just mentioned the idea around winning with distinctive product, and I think that's a big piece.

So if you think about some of the focus areas -- weddings, health and wellness, active; again, beauty -- we've talked about some of those things already.

Great.

And a question on Backstage.

Did I hear correctly that you are only opening one free-standing store this year?

And if that's correct, were you disappointed at all with the performance of the six pilot stores?

It is correct that it's one store, and I wouldn't say disappointed.

We are trying to learn from these before we expand them more broadly.

And again, part of the pilot is also testing in-store to see where we think growth may make the most sense.

And so I would say 2016 is just a continuation of the learning.

Got it.

Thank you.

Matthew Boss, JPMorgan.

So on gross margins, prior to this year, the model was pretty consistent in the 40% range.

What provides you the confidence in some of the recapture that you are guiding to this year, versus gross margins potentially just moving structurally lower for the space?

Again, I don't expect to get back to the 2014 level all in 2016.

But we do think last year, or 2015, was an anomaly, given the weakness in sales, and particularly in the fourth quarter with the seasonal categories.

Obviously it was an unusual weather here, or at least we think it's unusual.

And it just caused a tremendous amount of markdowns, given the sales decline.

Great.

And then just a follow-up.

You mentioned monitoring this recent rise in credit delinquencies.

Just any additional color on what you think some of the underlying drivers are.

And have you seen any -- or heard about any tightening of potential approvals, or any tightening in lending to potentially expect?

Well, one of the positives for Macy's is that with our conversion to a new system, we actually have greater capabilities of granting credit.

So I think, in our case, the opposite will happen this year.

And I think that was part of the fourth-quarter results that we're able to better monitor customer behavior, and therefore we are able to approve more new credit than we had anticipated.

Great.

Best of luck.

Lorraine Hutchinson, Bank of America.

I wanted to follow up on the SG&A investments that you are making, maybe just some help with what the largest buckets are.

Obviously you've done a very large restructuring and cost-cutting.

You have incremental real estate gains flowing through there, so it's a lot of investment for a year where sales aren't higher.

So I was just wondering if you could help us out with the magnitude of what those might be.

Sure.

The largest increases would be, in terms of the growth initiatives, would be in digital.

As you heard me say, that business continues to grow very rapidly.

And we not only need to invest in supporting that sales growth, but also looking forward, particularly, as I said earlier, on mobile.

So I think there's a lot of investment being made in digital growth, which, by the way, is not all digital sales.

Part of that is omnichannel investments, so the customers can easily go back and forth between stores and the Internet.

So that's the biggest chunk, but also Bluemercury, Backstage, China, which were very small numbers in 2015.

Again, we are investing to grow those for the long-term, which I think you would expect us to do.

So those would be where the biggest investments are.

Thank you.

Renato Basanta, Sterne Agee.

I just wanted to talk a little bit longer-term here.

So, clearly, some of the cost savings are a big driver of EBITDA expansion in 2016.

But can you just help us think about the longer-term 14% EBITDA target?

Maybe if you can discuss the timeline to getting there that's embedded in your plans.

And maybe talk at a high level about comp levels, gross margin, and SG&A progression over time that gets you back to that 14% rate?

Well, I'm not sure I can give you a specific year-by-year.

As we said, this year is the year for resetting.

And we're hoping that obviously our comp sales return to positive territory, at least by 2017.

And so, as that happens, that helps the SG&A leverage.

And depending on the sales growth, obviously will have an impact on how quickly we get to the 14%.

Okay, thanks.

Paul Lejuez, Citi.

Just curious -- on the Backstage opening, I'm just curious, what does it cost you to open a stand-alone store?

And what's the capital layout when you do one within a Macy's store?

Also curious (technical difficulty) amount of the comp base at any point (technical difficulty).

So, let me start with -- is your question why are we opening one more?

No, I'm just curious about the cost to open your Backstage stores on a stand-alone basis versus what it costs (multiple speakers).

When you open it in-store, the capital is less, but then there is also more cannibalization of the existing store.

So the equation is different than when you open a freestanding.

Interestingly, with the free-standing stores, we have found no impact on nearby Macy's.

But obviously if you take 25,000 or 30,000 square feet out of a Macy's store, there will be some impact on the store as you shrink the remaining store.

So it is a different calculus.

Right, right.

And do those stores come out of the comp base when you do one within a Macy's store?

Now, because it's -- no.

No major disruption.

And then just curious on the store closings that were done at the end of 2015.

What's your assumption for percent of sales you expect to transfer to another store, or move online?

Or do you actually think closing those stores hurt your online business, which I think you have alluded to in the past?

Well, it varies by market, depending on the density of other stores around it.

So I can't give you a specific number.

But we do expect to retain some sales, but probably less than what people might expect.

Dot com, typically we do worse when we close a store, because as I have said repeatedly, this omnichannel behavior is very important for our customers.

And if they don't have the store to browse in or return to, they don't often shop as much on Macys.com.

So that's an offset in terms of the retention we get from closing the stores.

Okay.

Thanks, Karen.

Good luck.

Paul Trussell, Deutsche Bank.

I apologize if I missed a few of the details earlier on real estate, so my main question -- my first question will be to have you repeat it.

Apologies for that.

But just the details around the $235 million guidance for 2016.

I believe you mentioned about $86 million or so of it is Brooklyn.

And then could you talk about what the additional $150 million of asset sales that -- none of that is the bigger stores, is that correct?

Correct.

Sounds like you heard it fine.

Got it, okay.

I wanted to just clarify that.

And in terms of your Top Door strategy, could you just speak to, at least at this point in time, how should we think about the comp performance of these stores that you are targeting now versus the rest of the store base?

And how do you expect that to progress as you make some of these investments?

Well, as you might expect, these stores are important to our sales and profit.

And so, again, we're hoping that they outpace the rest of the Company.

And then just lastly, in terms of the tourism impact, you mentioned getting hurt by 1 point in the fourth quarter.

How do you expect that to progress over the course of 2016?

We will have to see.

But I don't know, at this point, obviously what that's going to be.

If it continues -- we've been tracking it on a two-year basis so that we understand that better.

And we will just have to see what transpires on that front as we get into the year.

It could continue to impact us by 1 point.

I don't expect it to be more, but it is possible that that could continue to be a headwind we continue to face.

Great.

Thanks for the color.

Good luck.

Oliver Chen, Cowen and Company.

Regarding next year, how are you thinking about inventories in terms of how you are planning them, relative to last year and what you're thinking there?

And then also, as you have refocused these strategies to the next level of thinking about the customer and the environment, what are your thoughts on your speed and your supply chain and your relationships with vendors, and how you think about discounts and allowances, and just matching supply and demand as everybody gets faster and the customer gets faster, too, in terms of what they expect relative to when goods are shipped?

I think the key thing is obviously we also are trying to get faster, and working closely not only with our private brands but also with the market to make us respond quicker, be more agile, and make decisions faster.

So obviously our private brand group is leading the way on this.

Obviously because we are they, so it's easier to move faster.

But I think our vendors are responding as well.

Okay, thank you.

And are inventories also planned down throughout the year?

Or is there a cadence in terms of (multiple speakers) how you are thinking about it?

We are always trying to get parity between the inventory and the comp sales level.

And obviously, at the end of the year, being up 0.7% is a little higher than what we're planning in the first quarter, so we'll have to see as the year goes on.

Okay.

And we had a question on your comments about less couponing and the markdown strategy, why do you think that worked strategically?

What worked in terms of the customer really responding to this?

Just trying to understand (multiple speakers) tested it.

Yes, I think what happens is customers want simplicity.

And when you are looking for deep clearance goods, you could just see the price of the item and not have to do the math in your head, and it's easier.

We have also segregated those goods and put them in a separate part of the floor, which I think that customers responding quite well to, also.

And at the same time, the parent departments look even better.

And our hope is that regular price selling will improve because you can -- there's less clutter on the floor, by moving this clearance merchandise into a separate area.

Thank you.

And just our last question, we do think you have a competitive advantage with bricks plus clicks.

But what would you highlight as you compete against Amazon and other pure plays as your key competitive advantages in the apparel market?

Well, I think a lot of it -- I said is -- the store base and having the ability for customers to interact with us in different ways.

The second, I think, is our talent in the whole fashion arena, from picking, editing the assortments, presenting it, and the vendor relationships.

And I think that is a huge competitive advantage today vis-a-vis Amazon.

But I think it starts with the store base and our understanding of the fashion customer, which is different.

Thanks, Karen.

Best regards, and thanks for all the strategy and details.

Kimberly Greenberger, Morgan Stanley.

This is [Greg Begley] on for Kimberly.

You don't sound like Kimberly.

(laughter) Just a question, Karen, you mentioned the leverage is about 15% higher than it was last year.

Looks like cash balance is at a low, since 2008.

That, in addition to some of the real estate initiatives you have going on, just wondering how that may dictate future share repurchase activity.

And then I have a quick follow-up.

Well, obviously it all goes into the mix.

We do, as you know, want to remain an investment-grade company.

And getting our leverage ratio back into the target area is important to us; again, primarily through EBITDA growth, but all of that will factor into the buyback this year.

Great.

And then you mentioned e-commerce was strong in the fourth quarter.

I was wondering if you could talk about the margin profile of that business in the fourth quarter.

As you think about longer-term, getting back to that long-term EBITDA margin goal, do you expect a recovery in that margin profile of that business, or --?

Yes, there's a misperception that digital growth comes at a lower margin.

That's not really the case.

And again, there's lots of different transactions, whether it's shipped from store, shipped from warehouses, et cetera.

But that is not a negative drag on our margins as we go forward.

We love digital growth.

Joan Payson, Barclays.

Could you talk a little bit about the comp guide, and I guess what categories you expect improvement in?

And also the composition, in terms of transactions versus AUR in 2016?

Yes, I don't know how to answer that question, particularly the second part of the question.

In terms of the comp, just because it's -- my guess is there's going to continue to be pressure on traffic.

But how that all works, I just don't know how to predict.

In terms of categories for growth, we do expect to keep focusing on some of the categories we have talked about before: beauty, active, big-ticket furniture and mattresses, health and wellness in total, the wedding-related businesses, dresses; a lot of the businesses we have been focused on so far.

I'm sure I'm missing something there, so I apologize if I missed something.

And our hope is that the traffic improves as we get through the year.

Okay, thanks.

And then given the growth of online, how are you thinking about the right size of the store footprint longer-term, especially after closing these 40 stores recently?

Well, I think the key thing is we really do believe that omnichannel is the right answer.

And so, by testing things -- for example, the Backstage in-store as a way of driving traffic, some of the things that we're testing in the Top Doors in terms of incremental special appearances and makeovers, and all kinds of services that we can provide in the store -- we are, again, hoping to build on that and make our store base even stronger.

Okay.

And then just finally, we've heard this season a number of vendors beginning to talk about working to be less promotional and doing more full-priced selling, going forward.

Has that changed the vendor discussion or relationship at all for you in particular?

No, we are having the same conversation.

Okay, perfect.

Thank you.

Stephen Grambling, Goldman Sachs.

Sticking with online, how much of the double-digit growth in the channel has been driven by broadening the assortment versus turnover of existing SKUs?

And as a follow-up to an earlier question, how have you been approaching the profitability of online, on an item basis, as you have expanded the assortment?

It has been only expanded to more closely parallel what's in the stores, so most of the growth is coming from comp categories as opposed to expansion.

Great, that's helpful.

And then on mobile, you mentioned that this will be a big investment.

I think you said earlier it would be for customer-facing enhancements and improved functionality.

What are some of these changes that we should be expecting?

Or asked another way, what are some of the key feedback you receive from customers that are directing you in those changes?

Well, I think a lot of it has to do with the ease of shopping when you are on a mobile device, whether it be the mobile-enabled Web, or on our app.

So things like a natural language search, we are looking to add.

Different filters and facets, as you navigate, is a big one.

Also trying to what we call optimize the purchase funnel, things like adding bag to check out and all kinds of things that just cleans it up and makes it easier to use.

Is it fair to say that it's all about conversion?

A lot of it is conversion.

Actually, most of what I just said is; but there's some other things also to help traffic.

Okay, thanks so much.

I'll jump back in the queue.

Best of luck.

Michael Binetti, UBS.

Thanks again for all the detail on the call today.

Just one thing you said -- I'm trying to marry together two comments you made earlier.

You mentioned that you were happy with the early results you're seeing, as you separate the clearance apparel to its own section and tweak the pricing strategy.

Then you said, your hope would be that you would see better full-priced selling in the remaining apparel section.

Can you just talk about whether that's a trend that you are seeing early on?

Or did you mean that that's a dynamic that's lagging so far?

And if so (multiple speakers) be seeing?

No, it was actually -- well, if we had a lot of debate and when we started testing it.

I thought that regular-priced selling would be much stronger, because it would be easier to see.

Others thought regular-priced selling would get hurt, because the clearance customer would go to this clearance area and maybe not buy the regular priced while she was shopping for clearance.

So far, it goes both ways.

And there are customers like me, and there's other customers, and it's really offsetting.

And there's really been no impact.

So, overall, the results have been very positive, but I'm still hopeful.

But again, that's just my bias that I think that regular price may help as we go forward.

But there's been no negative, either.

Okay.

Interesting.

Yes, some of the vendors, as John said, I think we were talking about that a little bit.

That will be interesting to see that roll forward.

It will be very interesting.

And that's why you test and you learn, and you try to just keep getting better at it.

There was one mention in the press release about some -- that sounded maybe like some of the $400 million in cost saves started in the fourth quarter.

Would you mind just talking to that $400 million of cost saves, and what the pace of that looks like through the year in 2016?

Yes, no, the $400 million didn't, but the cost saves that we did last year were still rolling through in the fourth quarter.

So, I would say the fourth -- sorry, the $400 million is probably 3 1/2 quarters where we will get that savings; for the first half of the first quarter, a lot of those savings haven't completely happened yet.

But it will roll in, in full force, mid-quarter.

Okay.

And then if I could just ask one last one.

A couple things you didn't mention is -- would there be any potential benefit in the first half as you guys anniversary the West Coast port from a year ago?

And then there was a bit of a blip with the buying reorg last year that caused some disruption.

Any chance that we see a benefit lapping that?

Thanks.

Well, we have factored in some improvement in the first half as a result of the receipt disruption last year with the port strike.

So we will see if, in fact, that happens.

But we have thought about that.

And in terms of the impact of the restructure, it actually -- that was something that we believe we felt through the whole year.

So it wasn't just a first-half disruption.

Okay, so that's in the numbers.

Okay, thank you very much.

Michael Exstein, Credit Suisse.

And couple quick ones for you, Karen.

Number one, any comments on the energy markets?

A couple of your competitors have called them out.

Secondly, you restated inventories in the fourth quarter.

Can you give us the background on that?

And finally, a strategic question: what's more important to the Corporation, coming back to the 14% EBITDA margin, or market share growth?

Well.

In terms of the energy markets, they were not as weak as the West Coast, but obviously weather was less of a factor there.

So weather was a standout for us, but we didn't do great in the energy markets either.

Okay.

I'm not sure what you mean on the restated inventory.

The inventories on the balance sheet that you just published are slightly different than the one --.

Oh, last year?

Yes, exactly.

There was just a slight switch in our inventories, between payables and inventory.

So, it's not a major factor.

Okay.

And this year and last year are now restated to be the same.

Okay, thank you.

And then --.

Your last one is a hard question.

This is one where we always try to get balance.

We do think market share, and particularly comp growth, is important.

But we also think doing so in a sustained, profitable way, with high returns, is also important.

So that's where balance comes in.

I will say, though, without comp growth, it would be very challenging to get to the 14% because of the fixed costs in the business.

So I think they have to go hand-in-hand.

Okay.

Good luck, and thank you so much.

Omar Saad, Evercore ISI.

Following up on Michael's question, actually, on the importance of comp growth, can you rank order what you see as the key factors to your comp guidance for this year getting back closer to that flattish level from the -- I guess it came out to minus 3, minus 4 in 2015.

And it's okay to put weather; weather is -- a seasonable winter is one of the key factors.

But just how you think about the importance of the different things needed to get back to the level.

Well, again, you are going from the minus 2.5 to the approximate minus 1. I think that's the appropriate comparison.

There are lots of scenarios that get us to the guidance that we're talking about that rank things differently: tourist recovering, tourist not; weather great, weather not great.

Our strategies all hitting on all cylinders, some of them not.

So I can't give you one arithmetic that got us to the guidance.

As you might imagine, we look at all kinds of scenarios to get us there.

Got you.

And then if I could ask, you made a comment at the very beginning of your prepared remarks about the importance -- the right growing importance of browsing and researching online and mobile.

Can you maybe talk a little bit about how you are incorporating some of the learnings there into the strategy, the omnichannel strategy, and what are the key factors?

Yes, well, I think the idea is -- and we talked about mobile.

As that becomes more important, how do we help customers get the information they need on their devices, whether it be product reviews, or even, in some cases, how to find their way through some of our bigger doors?

So the better I think we make these mobile devices, the more we're going to get the interaction between stores and online to help our business going forward.

Do you find that the consumer who has spent a lot of time online researching and browsing behaves differently, once they are in the store?

Do they --?

Some do, some don't.

It depends.

There's a lot of talk about people shopping and being more purposeful when they come in the store.

Others are still doing the old-fashioned shopping that we used to do, and often then going home and buying online.

So there really isn't one answer.

But we do find that, in our categories, having the store is a huge advantage, whether it be to check a color, check size, spend an afternoon with your friends and shop.

Or going for a service experience: a makeover, for example, or a special appearance.

Got you.

Thank you, Karen.

That's really helpful.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit at the Plenti loyalty program, how that performed, what you saw there?

And lastly, any update on private label and the initiatives for 2016?

Thank you.

Yes, Plenti is still early to really judge.

As you know, we've got now over 11 million customers enrolled, which we think is very good.

And we're beginning now to see people using their points, and coming into Macy's having earned their points in other retailers.

But I think it's too early to really know how that's doing overall.

In terms of private brand, obviously this is a major strategy for us, and it has been historically a huge strength of the Company.

And we are obviously investing to, in certain categories, move faster and make decisions quicker, and take some of the complexity out of the processes between our merchants and our product designers; and for some of the fast-moving fashion areas, to do all we can to keep taking time out of the system.

Got it.

And the Millennials floor in 34th Street looks a very good.

What are you seeing for Millennials?

And will that be replicated in any of the other stores?

Thank you.

It's hard to replicate Herald Square in other stores.

You're right; it looks fabulous and doing very well.

But we are taking ideas from there and putting them in other markets.

And part of it also is trying to mix experiences in with merchandise.

So I think we learn from Herald Square, although you really can't replicate it, per se.

Thank you.

David Glick, Buckingham Research Group.

A question -- one of your strategic planks is to win with distinctive product.

And I'm just wondering how that lines up with a trend that we're seeing in terms of a lot of the brands -- some of which you -- that are key for Macy's, and are moving and embracing doing business with Amazon.

And obviously without being brand-specific, how do you combat that?

Are you looking to have a more styles, more brands exclusive to Macy's?

And how do you combat that along with -- a lot of these brands are capitalizing on consumers' desire to use Amazon Prime?

Well, I think what you've heard us talk about for a long time is trying to have more exclusive products within our stores, whether it be brands completely or private brands, or exclusive products from some of the key vendors.

And that continues to be the case.

We also hope that our organization continues to be the best at curating these brands, and continue to give the best assortments that we can.

And I had one follow-up.

What's the share count embedded in your EPS guidance assumption for 2016?

We don't give share counts.

So in terms (multiple speakers).

You'll have to sort through that.

Okay.

Thanks.

Good luck, Karen.

Brian Callen, Bank of America Merrill Lynch.

Given some of the downward movement in credit ratings in retail, and just the negative watch and outlook for Macy's, can you speak to some of the balance sheet limitations as you evaluate the partnerships or JVs with real estate?

And then second, can we assume that your guided leverage range wouldn't be changing, and the intention is not have your rating fall to Baa3/BBB-?

As we have stated, last fall and again now, being investment-grade is important to the Company.

And as I mentioned, our leverage ratios have fallen above -- maybe the word risen above -- our target range, and that we are expecting, with EBITDA increases, to get back into our target leverage ratio range.

Okay.

Then the just back on the -- any limitations you are feeling as you evaluate these partnerships or JVs?

Well, if you were willing to take on a lot more leverage, obviously that would change the dynamic.

So there is some limitation because of our belief that being a retailer, it is important to be investment-grade.

Okay.

Thank you.

We have no further questions in queue at this time.

I will now turn our conference back over to our moderator for any additional or closing remarks.

Thank you all for your interest, and obviously follow up with Matt or me if you have any further questions that didn't get answered this morning.

And thanks so much.

Take care.

This does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.