梅西百貨 (M) 2017 Q2 法說會逐字稿

Good day, and welcome to the Macy's, Inc.

Second Quarter 2017 Earnings 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, ma'am.

Great.

Thank you.

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

As she said, I'm Karen Hoguet, CFO of the company.

Joining me on the call today is Jeff Gennette, our 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 2 hours after the call concludes.

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

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

On this morning's call, I will take you through our results for the second quarter and our outlook for the back half of the year.

Jeff will provide some perspective, and then we will both take your questions.

So let's get started.

Our second quarter performance demonstrates that we are on track to produce sales and earnings consistent with our annual guidance that we provided at the beginning of the year and affirmed at our June Investor Meeting.

As the quarter progressed, we saw sequential improvements and continued to gain confidence in our strategies.

We believe we are on the right track to achieve our objectives.

Sales in the second quarter were $5,552,000,000, down 5.4% from last year.

Comparable sales on an owned plus licensed basis were down 2.5% versus last year.

This is much improved relative to the first quarter and is also somewhat better than we expected when we started the quarter.

As I will discuss in a minute, both the base trend as well as the initiatives that we outlined at the Investor Meeting helped to improve our sales trend.

This is in spite of weaker international tourists sales, which we did not anticipate.

In the second quarter, international tourists sales were down approximately 9%, which was much worse than in the first quarter and negatively impacted our comp owned plus licensed sales in the second quarter by approximately 40 basis points.

At our Investor Meeting in June, you will recall that we estimated that our base trend for our comp owned plus licensed sales on an annual basis was in the minus 3 to minus 4 range.

And to that trend, we expected that our strategic initiative to contribute $200 million to $260 million of additional sales in the last 9 months of the year.

The second quarter results would indicate that our base trend is towards the better end of that range, and we estimate that the strategies discussed at the meeting contributed approximately $60 million to our sales in the quarter, consistent with the expectation for the 9 months.

These strategies that we highlighted included retention from closed stores, Backstage in-store and our key merchandising initiatives.

Let's talk for a minute about each.

First, retained sales.

We are capturing sales from closed stores consistent with our expectations and better than what we produced in prior years.

Retained sales from the closed stores in total represented about 12% of the closed stores sales.

And as we discussed in June, the retained sales in multi-store markets was much higher than that.

Backstage, our off-price offering, is adding approximately 6% in incremental sales to the 38 stores in which we now operate Backstage stores within our Macy's stores.

We believe that this strategy, which offers simplified pricing, a treasure-hunt environment and lower price points is resonating with many of our customers and adding to the Macy's experience.

We continue to test different approaches and monitor the results and expect to decide by year-end how best to expand this concept within our stores.

And the third, the key merchandising initiative, which we highlighted in June - shoes, fine jewelry and furniture/mattresses - are the third part of that initiative.

The shoe pilot rollout is now complete.

All locations now have a more edited assortment with more depth in the styles that we carry.

And all locations also received added staffing and varying degrees of technology.

But there are variations in the strategy beyond this across our stores depending on the location.

For example, approximately 170 locations now carry elevated products, more in line with what our customer wants in those locations.

And in 68 other locations, we converted them to an open shelf format.

Both of these variations are proving to be very successful where they have been executed, but neither would work well in all locations.

Our shoe business overall was up mid-single digits in the quarter.

And remember, the rollout wasn't even complete until the end of July.

We are also working to improve our digital experience for shoes, which will also help accelerate our sales trend.

In fine jewelry, we completed the rollout to the final locations, having started this rollout close to 2 years ago.

Sales in fine jewelry were up double digits in the quarter, which is terrific news, particularly where the strategy has been in place for more than a year.

And furniture and mattresses, another focused business, also had strong sales in the quarter.

We are adding or expanding 58 furniture and mattress departments in our Macy's stores across the country this year, about 2/3 of which have already been completed.

So in total, these initiatives are all on track and helping to change our sales trend.

And remember, these estimates don't include the benefit from the new marketing strategy starting in September and the enhanced loyalty program, which is being rolled out in time for the fourth quarter.

In addition to the strength of shoes, fine jewelry and furniture and mattresses, we also performed well in the quarter in fragrances, active apparel and men's tailored clothing.

The weaker categories in the quarter included cosmetics and housewares.

Our digital sales continued strong in the quarter with double-digit growth.

This is the 32nd consecutive quarter when that has been the case.

We are generating outside -- outsized sales growth in particular on our mobile devices, and they are also being used increasingly to enhance our in-store experiences.

For example, a customer can scan an item on our mobile app while in store to see pricing, availability and any product reviews.

They could also then buy the items straight from the app and have it shipped.

Also, customers can access a myriad of features specific to an individual store on our mobile app, including a directory, special events, et cetera.

Geographically, regional trends were consistent across the country.

Bloomingdale's also had a stronger performance in the second quarter relative to the first in stores, digital as well as in our outlets.

During the second quarter, the number of transactions was down 5.5%, much improved from the 7.5% decline in the first quarter.

Average unit retail was up 1.2% with units per transaction up 1.8% in the second quarter.

The gross margin rate in the quarter was 40.3%, down 60 basis points versus last year, better than anticipated, largely because of the stronger sales.

At the end of the second quarter, our inventory was down 3% on a comp basis.

This positions us well for the back half of the year.

SG&A in the quarter was $1,934,000,000 down $92 million or 4.5% lower than last year.

The SG&A includes $43 million of real estate asset sale gains this year versus $21 million last year.

Excluding these asset sale gains, the reduction of SG&A in the quarter was $70 million or 3.4%.

This reduction is due to closed stores and the restructuring completed at the start of the year, partially offset from some timing shifts from the first quarter and our investments in digital growth.

Income from the credit in the quarter was $183 million, which is $2 million higher than last year.

Remember, this relates to income from Citi, our partner in the business, and doesn't include all the expenses associated with the credit operation, such as charges associated with fraudulent purchases and the cost of new account origination.

For the first half of the year, SG&A, excluding real estate asset sale gains, was $170 million below last year, which is consistent with the net $300 million annual reduction commitment we made earlier this year.

As a reminder, it was a $550 million SG&A reduction, which we expected to offset with $250 million of reinvestments into the business.

As you know, we recognize the need to continuously find ways to conduct our business more cost effectively and smarter.

We will continue to make changes that free up resources to invest in making our company more successful.

These investments in digital and in our stores are necessary if we are to compete more effectively.

Operating income in the quarter was $305 million, excluding $51 million of noncash retirement plan settlement charges.

Interest expense in the quarter was $79 million, excluding the net premiums and expenses associated with the early retirement of debt.

We have reduced our debt by approximately $550 million in the first half of this year, including the repayment of a $300 million maturity in July and the repurchase of approximately $247 million in the open market.

Tax expense was $64 million in the second quarter with an effective tax rate of 36.2%.

Net income was $116 million after adjusting for the net loss attributable to the noncontrolling interest in our China joint venture.

Excluding the retirement plan settlement charges and the net benefit associated with the early retirement of debt, net income was $146 million in the quarter.

Diluted share count in the quarter was 306.5 million shares, with earnings per share on a diluted basis being $0.38 in the quarter as compared to $0.03 last year.

Remember that last year in the quarter, we booked $249 million in impairments and other costs, primarily related to our decision to close approximately 100 doors, of which 70 have already closed or announced to be closed.

As we said last year, our intent was to look out a few years in deciding how many to close, and we are still planning to close the remaining, approximately 30, locations.

We also booked $6 million of settlement charges last year in the second quarter.

So excluding the quarterly settlement charges in both years, the net premiums and expense associated with the debt repurchases in the quarter this year and the impairment and other charges last year, earnings per share on a diluted basis were $0.48 this year as compared to $0.54 last year.

Cash flow from operations net of investing activities was $323 million this year as compared to $222 million last year, an increase of approximately $101 million.

The major variance is related to the decrease in inventory, lower CapEx and higher asset sales this year as compared to last year.

So the key message is that the second quarter was as expected and keeps us on track to achieve our annual guidance of comp sales of minus 2% to minus 3% on an owned plus licensed basis and diluted earnings per share of $3.37 to $3.62, excluding the impact of noncash retirement plan settlement charges and any net premiums and expenses associated with debt repurchases.

Further excluding the gain on the Union Square Men's store, which is expected to be booked in the fourth quarter, diluted earnings per share is still expected to be $2.90 to $3.15.

Let me provide some color on what this means for our assumptions for our performance over the next 6 months.

One, comps sales on an owned plus licensed basis in the fall season are assumed to be down 0.8% to down 0.6% (corrected later in Q&A), which would result in the annual guidance range of the minus 2% to minus 3% on that basis.

We are assuming that comp owned plus licensed sales in the third quarter would decline by approximately 2.5% or slightly worse.

Remember that 2017 is a 53-week year, meaning fiscal January has a fifth week.

Our total sales include the sales for this extra week, whereas our comp sales do not.

For the year, this adds approximately 100 to 120 basis points to our total sales growth rate.

The annual gross margin rate is now expected to be between down 50 to down 70 basis points relative to last year, with the fall expected to be down 20 to down 50 basis points relative to last year.

This is 10 basis points on the annual guidance better than what we had guided in June, because the second quarter beat our expectations.

We are expecting SG&A, excluding asset sale gains, to be down in dollars approximately 3% to 4% versus last year in the fall season.

Achieving a 3% reduction, combined with the results from the first half of the year, would be consistent with the $300 million annual commitment made at the start of the year.

We provided guidance in February for the book asset sale gains expected to be booked this year.

You'll recall that the guidance at that time included the following: approximately $235 million associated with this sale of our Union Square Men's store that was sold last year, and the guidance included approximately $180 million to $200 million of additional gains, split between Brooklyn at approximately $100 million and $80 million to $100 million associated with the sale of other property.

Our assumption for the Union Square gain remains unchanged.

However, as we said in June, we expect now that the other asset sale gains will be higher.

The asset sale gains, excluding the Union Square Men's gain, are now estimated to be approximately $275 million to $300 million instead of the $180 million to $200 million of gains that we had estimated in February.

Annual interest expense is expected to be approximately $315 million, (corrected by company after the call) excluding the net income -- net impact of any premiums or expenses associated with debt repurchases.

This is lower than our original guidance due to the earlier than assumed repurchase of debt.

We are still assuming an annual effective tax rate of approximately 37%, and we are still expecting our capital expenditures to be approximately $900 million for the full year.

So those are some of our key assumptions supporting our earnings guidance.

Let me now give you an update on real estate.

Well, we continue to work very hard on maximizing the opportunities, there is not a lot new since our Investor Meeting in June.

We are executing as fast as is reasonable our multi-pronged approach, as we have discussed previously.

As you heard with our higher guidance for asset sales gains this year, we are making significant progress in monetizing assets.

As for the flagships, the marketing process is well underway for the upper floors of State Street in Chicago, and we hope to have an update by when we next report earnings.

And the work on Herald Square continues.

As you know, this is a very complicated and strategically important asset, it will, therefore, take time to develop the best plan for this location.

As you might imagine, we are being very thoughtful in our approach to this location.

And the work with Brookfield is also ongoing.

They have performed a great deal of predevelopment analysis this year.

Remember, our strategic alliance includes approximately 50 properties, which are intended to be representative of our total portfolio.

They are studying each of these to see if the initial redevelopment opportunities merit proceeding.

Remember, most of these assets are related to strategic locations, where we plan to continue to operate as Macy's.

The intent is to create value and to improve the retail location.

The preliminary work would indicate that it is likely the Brookfield will recommend proceeding on roughly 2/3 of these.

This development process takes a lot of time, but rest assured that we and the dedicated Macy's team at Brookfield are putting a high priority on bringing these projects to fruition and are making progress against our original goal for the strategic alliance of creating value from our real estate with little disruption to our retail operations.

With that, let me turn it over to Jeff for brief remarks, and then we'll open the line for your questions.

Thank you, Karen, and good morning, everybody.

So as Karen noted, the second quarter came in as we expected, and we are on track for delivering the full year guidance.

We essentially provided a fair amount of detail on our strategy at the Investor Meeting on June 6. My remarks today are going to be brief, but I do want to add some perspective.

So while we have a lot of work ahead of us, I'm encouraged by what we're starting to see.

We're starting to get traction on some of our early initiatives.

In particular, I'm very proud of the work that the women's shoe and fine jewelry teams did, as they completed the new model rollouts across all of our stores, and they did this at an accelerated pace.

As you heard from Karen, this is having a positive effect on our results, and it's a great example of the benefits that Macy's gets when we test, when we reiterate and when we scale nationally, each step along the way driven by data and the consumer analytics.

Our Backstage in-store also continues to perform well giving the full store a decent lift.

The Backstage team is in the iterate phase right now, and we expect to have a model ready for rollout by the end of this year.

And consistent with our vision of letting customer shop the way she lives, we remain focused on our goal of stabilizing the brick-and-mortar stores, while investing for accelerated growth in digital and mobile.

We're also excited about the launch of our new marketing strategy in October and our new loyalty program in October -- the marketing strategy was in September, new loyalty program is in October.

Both of these are on track, and we expect it will help our sales trend as we move through the back half of the year.

So I'm encouraged by the second quarter, and we're on track for the year.

But I also know that we operate in an environment of intense and disruptive competition, and that our customer has been shopping -- has more shopping options than ever, and we need to provide her with a compelling and a unique proposition.

So winning in this environment requires us to act with a great sense of urgency, to make changes in how we operate and to move faster.

And as we do this, I am confident that Macy's will win again.

So with that, we're going to open up the line, and Karen and I will take your questions.

(Operator Instructions) And we'll take our first question from Matthew Boss from JPMorgan.

So as we think about your back half same-store sales guidance, I guess, how would you rank the drivers of improvement as we think about the overall back half, but more so, the fourth quarter versus the third quarter?

And with that, what's the expectation for traffic versus what you saw in the second quarter down mid-singles?

Yes, Matt.

I think it's going to be -- the traffic is going to be pretty consistent with what we experienced in the second half of the year or in the second quarter.

I think the initiatives and kind of ranking them, certainly, fine jewelry and what we're experiencing in women's shoes, Big Ticket, fragrance, some of the place that we have in apparel and the classifications business like dresses, we expect to be a significant piece of the trend improvement as we get into the back half of the year.

I think we expect that the -- new marketing strategy, we haven't really accorded additional sales for that, but we think we're going to peak a lot of interest from our core customer.

And we're also anticipating, although we don't know what it is yet, about how the new marketing or the new loyalty program will affect our business.

So I think with the new initiatives that you've seen from us, expect us to become more important in the back half of the year.

We're also going to learn a great deal in Backstage in-store, more for us to learn on what we will scale into 2018 and beyond.

But we expect that to get more clarity on that as we get into the fourth quarter.

Great.

And then just a follow-up.

With inventory now reset exiting the second quarter, I guess, how best to think about merchandise margins in the back half of the year?

And is the primary drag on overall gross margins, is it just the continued mix shift towards e-commerce, just any ways to offset this over time?

Well, let me start, and then Jeff can add to that.

I think there are certain businesses that are under pressure in terms of the gross margin.

We talked about Beauty in the past and that continues to be the case.

And so that again, over time, we hope that we can offset that.

But at this point, for this fall, we don't think that, that's likely.

And so hence, our guidance being below last year.

The other thing, Matt, is that we are in a good position right now with our overall inventory level.

We're set up well for the sales that are ahead of us.

Our liquidity is in good shape.

But what Karen said about Beauty, there is also just some mix changes as we talked about in the Investor Meeting with tech watches at a lower-margin rate than the balance of watches.

And then really, the housewares category is under pressure with all the price transparency.

So I think we're in good shape in inventory, but we do still have those businesses that are weighing down our margins from where they were last year.

And we will take our next question from Paul Lejuez from Citi Bank.

Can you talk about the outlook for the credit card?

And your -- the profit, the yield you'll see there in the second half of '17?

Just any changes that you might be seeing in the portfolio?

No, I mean -- no, in February, we had talked about credit income for the year of $740 million to $760 million, which was up a little bit from last year and that would continue to be our guidance.

Got you.

And then you made a comment about Brookfield, I think, wanting to move forward or you expected them to want to move forward on 2/3 of the 50 properties.

What happens to the other 1/3?

The truth is I haven't looked at the specifics, but in most cases, it's sort of, no harm, no foul.

These were just sort of excess real estate that we had that we were trying to prioritize where we could create value from them.

And so if something doesn't have a lot of value, we'll just leave it alone for now, may be explore it down the road.

But we're trying to prioritize the opportunities where we can create the most value.

Got you.

And then just finally, any color you can add on performance in California, Texas, Florida, specifically?

Yes -- no.

Our sales performance, as I said, was fairly consistent geographically.

So I would say fine across the country, including those regions.

And our next question comes from Charles Grom from Gordon Haskett.

Just on the down 2.8% comp, Karen, could you show any perspective on how that turned in during the quarter?

And any early read-on on back-to-school, particularly in some of your southern markets?

Yes, as I said, it's sequentially improved as we went through the quarter in terms of comp.

I'll let Jeff comment on back-to-school.

Back-to-school, good sign so far.

There's a lot of good trends that are going on in the business.

Charles, to your comment or question about -- we're not seeing any differences really between how the southern stores are, outside of the fact that many of them have gone back to school, and so you are seeing some lifts there that are encouraging for where stores go later around the East Coast or in the northern states.

But we expect them they will even out when the calendar is evened up.

Yes, it's helpful.

And then on the store closure front, are you able to quantify what the benefit was in the second quarter?

And then when we look at the fourth quarter, it's a pretty big uptick to get to that down 60 to 80 basis points in the fall season against a tougher comparison.

Is the expectation that the benefit from the store closing will increase in the fourth quarter?

I am confused.

So the store closing benefit on sales, I had said was about 12%.

And at the Analyst Meeting, as we talked in June and we talked about the benefit from the stores being closed, we are on track for that number, which was $75 million to $100 million.

So we got the second quarter portion of that, and we expect to be in that range as we get through the remainder of the year.

I think your second question related to gross margin rate, Chuck, but I'm not sure I understand it.

No, just on the fourth quarter, just to get to the fall season comp guidance.

It's a pretty big uptick against a tougher comparison.

So I'm just trying to understand, what the specific drivers are to get there.

Well, let me start for a second.

As we gave guidance, we gave guidance for the fall, which is in the range of down 0.8% to down 2.6%.

We said that the third quarter would be around the 2.5% from the second quarter, may be a little bit worse.

So again, depending on what you think about the fall, in total, you'd get to a fourth quarter that most likely would be improved, again, depending on what you think or how you model it.

If you're more conservative about the fourth quarter, you'd be presumably at the lower end of what we're guiding.

Okay.

I got you.

And then just on a more favorable note, just on the Backstage lift of 6%, that's pretty impressive.

How quickly do you think you could roll that out across the chain?

And what's the target number of potential stores you could roll that out to?

What we are testing right now, Charles, is the -- we're looking at Backstage products in virtually all of our doors.

So we've got 37 doors right now that have got the Backstage within a Macy's store.

But we're also looking at Backstage product in those doors that would never get a Backstage-dedicated location.

So we're testing different formats.

The intent would be that we would have a scalable model that would work in all those doors that have available square feet where dollars per square feet or such that you could open up a cavity of 20,000 to 25,000 square feet, but then we're also testing doors that are very productive for us, that benefit from having really tasty designer values with Backstage pricing that we would be able to have that in any model by which we put them into our strategic doors.

So we're also working on the capital cost.

We are getting the capital cost down in those stores that would have a dedicated Backstage within a Macy's building and looking at the ROIs on those.

So we've got 4 models out there testing.

We hope to have 2 of those 4 ready to go in 2018 and beyond.

Number of doors, we're still in the early innings with this.

Let us get through the next 6 months, and then we'll have more clarity for you in the future call.

And our next question comes from Paul Trussell from Deutsche Bank.

Just a few quick ones, and I apologize if I missed this in your earlier remarks.

Just wanted to get some clarity on how Bloomingdale's performed in the quarter.

Also, if you could just speak to owned brands and their performance?

And also, Jeff, if you can just maybe just touch quickly also on Bluemercury and the rollout there?

And just what's you're learning from that acquisition?

And how that might play a role in future strategy?

Let me take each of your questions.

Bloomingdale's is number one.

We may experience a similar improvement in second quarter from first quarter as the Macy's brand did.

And they are -- many of their initiatives are -- they're getting great traction on.

Amongst them, really, brings up your second question, which is, what they are doing with their exclusive product or their Private Brands.

Their 100% Bloomingdale's initiative is really popular with the consumer.

And the more they're putting into that bucket, they've got very strong merchants that are working with their brand partners, and the customers are really liking those choices.

The Private Brands on the Macy's side is -- we are in good shape there.

We -- as we talked about in the Investor Meeting, we spent a lot of time on supply chain, working at reduced number of suppliers, reducing numbers of weeks of production and really focusing on regular price and first markdown sell-through, making bigger brands bigger, working on more fashion that we get into most stores.

And of our portfolio of 20-some Private Brands, we've got action strategies for each of those, and we are on track there.

And your last question about Bluemercury, we're very happy right now with the way the Bluemercury business is going.

And we've got a couple of -- we are looking obviously at their comps and what they do in their freestanding comps, and they are doing quite well there.

So doors that have been opened, obviously, more than a year, very strong comps.

Their new stores are performing particularly well.

We're making good real estate decisions.

We're going into markets.

One of the things that we've learned in Bluemercury is, the more locations you put into a DMA, the more it feeds on the success of that DMA.

And so you are seeing that in the island of Manhattan about how many Bluemercurys we actually can put into that, and they're just -- it's doing great.

You see, what really started that strategy was really in the Washington, D.C. metro area.

So Bluemercury, there's lots of opportunities for freestanding stores.

And there's also then Bluemercury within Macy's stores.

So one of the reasons we were very interested in the acquisition was what it could to as a Beauty spa model in Macy's stores, and we're working through all of that.

We're iterating on all of our early learnings on that.

And the hope is that we're going to have an actionable model to scale into a lot more Macy's stores in the future.

That's very helpful color.

And then just another quick clarification.

Just Karen, could you just circle back on the real estate gains expected for this year?

And just how the thought process has changed at all, just given where you all are year-to-date?

The thought process has not changed at all.

We've just been able to make more progress relating to the monetization of some of the assets than we had expected to be able to complete this year.

So the guidance had been $180 million to $200 million between Brooklyn and the other asset sales, and now we're taking it up to $275 million to $300 million.

And we'll take our next question from Randy Konik from Jefferies.

Just a couple of quick ones.

Just on you're thinking about the Analyst Day.

You gave us some metrics about the sales lift from Backstage.

I believe, it was up 6.4% in 2017 versus 4.6% in 2016.

Can we get some kind of color on do you think that continues to further accelerate in terms of the lift in the back part of the year?

That's number one.

I guess, second, when you think about the -- getting us again back to the Analyst Day, the customer segmentation of about, let's say, 10% of the customers.

Those best customers account for 50% of the revenues thereabouts.

And then you have the balance of the customers accounting for half or something like that, in fact.

How do you think about the marketing strategy in the back half in terms of going after the best customers to retain them and have them shop more in higher-average dollar sale versus activate some of the less good customers to drive incremental traffic in the back half of the year?

So let me start on the Backstage, and then I'll let Jeff respond in terms of the customer and the marketing strategy.

At the Investor Day, we had talked about expecting a lift from Backstage in-store of 4.5 to 7 points.

So the 6 points that we talked about for the second quarter is towards the upper end.

And our hope is that as we go through the year that will build.

And as Jeff said at the meeting, while I was assuming 4.5 to 7 points, he's pushing for 10 points.

But at this point, I think the 4.5 to 7 points, and again, the higher end of that is what happened in the second quarter would be what I would assume.

The only thing I'll add on that before I talk about customer is -- as much of the work as we're doing on the Backstage portion of the store when we add that experience into a building, we are spending as much time on what we are doing on the full price side.

And the opportunity to live the assortments there and really put more fashion in there, be more edited, be more curated, and that combination is what we believe can lift the results beyond the 6% to 7% that we're getting today.

Now remember that 6% is the incremental including, so the Backstage less the impact to the main box.

So as Jeff said, as we're working on both pieces, the incremental could go even higher.

And then your question about customer.

So what we talked about in the Investor Meeting was exactly what you just quoted was that 10% of our customer base fits about half of our sales.

And that really is what we have designed into for this loyalty program that we're going to be launching in the first week of October.

So stay tuned on that.

We're not ready to talk about the actual components of it, but it's launching, and it's tested very well with our best customers.

We think all of the things that she expects of Macy's and that she asked of Macy's or where places where she wanted them in the loyalty program and she didn't get in her previous one, we have now solved, too.

And then your other question about the balance of the customers.

We're addressing that in different ways.

We're looking at what when promotional strategy is going to be, simplifying our promotions, making sure we got the right values in the very important fourth quarter and making sure that, that customer who comes to Macy's, either online or in our stores during the fourth quarter, that we are very compelling and we've got the right values and the right content.

So we're not -- we're very focused on that as well.

But stay tuned on the loyalty program, that takes care of this top 10%.

And we're very hopeful that she bodes as strongly as the focus groups did.

So may I ask a follow-up?

Yes.

So just on the allocation of marketing dollars, are you saying that the marketing for the top 10% customer will really be about highlighting the loyalty program?

And then the balance of the customer base would be more about traditional kind of advertising techniques, while simplifying the promotional strategies, et cetera?

I'm just curious, and I'm really trying to get a sense of how you're thinking about back half allocation of marketing dollars between the 2 customer segments?

Let me just back up a bit and just say that when you look at the marketing strategy, we really wanted to reengineer the entire marketing machine at Macy's.

And it has a lot of moving parts as we look at the fall season.

Number one, we're going to remain very promotional.

And what we've spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other.

But we're doing that all the way through the back half and that really is a big focus of ours.

The other thing that we set out to do both for our core customers as well as our occasional customer is rebuilding our credibility as a fashion destination.

So what you'll start to see with the new marketing plan that really launches or the new marketing strategy that launches in September started with the back-to-school spots.

It starts if you go onto macys.com right now and you look at the edit, that really is a one-stop shop for all the hot trends, exclusives, newness.

We also have our new fashion campaign that launches in the end of September that we are excited about.

So all of that is in this marketing machine.

We've spent a lot of time with media away of really making sure that we're maximizing each of our -- both print and digital, all of our touch points that we're -- we talked about in the Investor Meeting what we were doing with television and how we are getting more production and weight out of fewer -- as many spots, but spending less in dollars to do that in order to fund these other opportunities.

So I think the new marketing strategy that is coming up in new loyalty program that, the core customer will be handled as well as the occasional customer.

And we will take our next question from Brian Tunick from RBC.

Two questions.

I guess, one, just a little more color on the Beauty side.

I guess you're calling it out as a weak category, yet there's been a lot of notice on the promotional changes you're making in that category.

So just wondering as you try to balance protecting your market share, how you're thinking about ongoing promotions if it continues to be weak?

And the second question is on the tourist impact.

We were just curious what kind of impact you're planning in the second half comp guidance?

I'll take Beauty, and then Karen will take on tourism.

I think when you just look at the Beauty strategy, overall -- let's go through the components.

Fragrance is very good, positive comps, we expect that to continue.

That's a big piece of our overall Beauty business.

What we're doing in Impulse.

They are really in the color and treatment area, where you have the flexible format.

We're getting that into a lot more doors.

It's brand-agnostic.

It's very flexible.

You've got guys that are cross-trained across all of the brands.

We're getting good traction with that.

You're going to see that in a lot more doors.

Obviously, we just talked about Bluemercury and our success there.

And what we're looking to learn from with Bluemercury in store, and the idea about getting services in the Bluemercury format that is really -- our customers are very wanted, very experienced in our main Macy's boxes.

So the balance of the color and treatment business is really what we have yet to solve.

We've got lots of test in play.

We've got new formats that are launching now that have been in place.

We're working very closely with our Beauty partners.

And that we hope through the balance of the third and quarters that we're going to have a model that we're going to want to roll out into more stores in 2018 and beyond.

Do you want to take...

Oh, I'm sorry.

On the tourist impact, that's in part why you see a wide range in terms of the guidance for the fall.

We were surprised by the second quarter, and we're still analyzing whether we think that will continue.

My guess is, it very well could, based on what we know.

But again, that's part of the reason for the wide guidance range for the fall season.

And we will take our next question from Omar Saad from Evercore ISI.

I wanted to ask for -- if you could provide a little bit more detail and color around the retained sales data points that you gave earlier.

I assume you're getting a lot of that information from the loyalty and credit card data.

Is there -- are you seeing any patterns in terms of which types of customers are staying with the Macy's brand, as you closed some of those stores or certain categories where you are seeing those sales retention?

Any information there could be pretty insightful.

Honestly, I don't know all of those details.

I do know that as we had discussed, when we close a Macy's store in a single-store market, it has continued to negatively impact macys.com sales, although by less than what it did a few years ago, but that's still a negative.

And in the multi-store markets, as I said, in June, it ranges from 15% to 40% of the sales that we can retain, and each one is somewhat of a different story depending on how far away the retained store is, the one that didn't close, and also, how similar the demographic is.

So it's hard to be precise there, but the good news is we are doing on the better end of what we had anticipated in those markets and better than what we did previously.

My presumption is, that it's the core customer that we're keeping is opposed to the occasional, but I'm not versed in all of the details in terms of where we're retaining the sales by category.

But the good news is we have been able to strategize looking at what people buy in the stores that we're closing and try to make sure that we have that in nearby stores.

And we'll take our next question from Michael Binetti from UBS Investment Bank.

Karen, just a quick modeling question.

As I think while what you're trying to tell us for the second half of the year on same-store sales, I think you said that if you're on the optimistic end of the guidance, it would leave room for positive same-store sales in the fourth quarter.

And I think you answered one of the questions about just assuming the traffic levels we've seen here sticking around in the mid-single-digit negative area.

I'm trying to think about -- just given the last few years how strange the fourth quarter is as far as promotional levels across the industry?

What -- I'm trying to figure out what you're trying to communicate to us gets better in the fourth quarter if traffic stays at these levels to get to the high end of that range?

I'm wondering if there's something, perhaps, that you know about how holiday worked in the stores that you guys have closed?

There will be a year-over-year mix benefit or anything like that, that we might be missing?

Well, if I were modeling the fourth quarter, I don't think I would be modeling a positive comp.

So you have to think of a balance of third and fourth quarter.

If we are going to be at the better -- if we do better in the third quarter, that would lead to the better end of comp, but we have to just start that in the third quarter.

You'd have to beat what I'm saying in the third quarter to get to the better end of our guidance, is a different way of saying it.

Now it could happen in the fourth quarter, but I would not be modeling it that way if I were you.

Michael, the only thing I would add say is that we expect the fourth quarter to be very promotional.

And it is -- and we're going to have all of our firepower ready to go for that.

Okay.

And as we -- I guess some people have asked about the roll forward on gross margins, but maybe I could just go back in time 2 months here and just ask you, I think the fourth -- the second quarter gross margin was a lot more volatile than what you guys are thinking at the beginning of the year and then even more volatile than you thought in June, when you told us it was going to be a lot lower.

When we met you in June, it went down 100, it came in well above that, so clearly, it got better in June and July.

Would you mind helping us think about what was so volatile intra-quarter that was a little harder for you to track, perhaps?

Well, I think it's easier to forecast planned gross margin and the normal markdowns required in the business relative to our marketing strategy.

When we're talking about clearing goods, remember we had talked about the overage and inventory we ended the year with, that we had hoped to get through the system in the first quarter and didn't.

That's harder to predict how well that will sell and how fast you can, in essence, get it through the system.

And I think that's the large part why you saw more volatility between June and the end of July.

Okay.

And if could just add -- end with one quick one on the jewelry strategy.

Obviously, you guys are very encouraged by what you are seeing there.

As you roll that forward to the holiday with your numbers continuing to be up double digits in 2Q, how aggressive can you be with that, the jewelry strategy for the holiday, given the strength that you have seen here?

Is there anything we should keep an eye for as we do our store checks through the second half year?

Hopefully, you're going to see it continue to do extremely well.

And obviously, it's one of our priority businesses, so we'll do all we can to strengthen it as we go through the holiday.

And we'll take our next question from Kimberly Greenberger from Morgan Stanley.

Karen, I wanted to ask about the credit income.

I think you've mentioned credit income grew $2 million year-over-year.

You noted it does not include new account opening expense and I think one other item.

Could you just repeat that and then give us a sort of fulsome picture, if you could, on credit income, including those items?

And then, Jeff...

Yes.

I just wanted to ask about the cosmetics business, if I could.

I know you added a promotion or a couple of promotions.

And are you finding that consumers are responding to that?

And is it helping to improve market share or potentially stabilize that business?

Yes.

Starting on the credit side.

The other item that I had mentioned was fraudulent transactions, and we don't quantify those amounts, but I just wanted to remind people that what we report relates to the Citibank income as opposed to sort of the total profitability of credit.

Credit penetration in the second quarter was approximately 46% or down 100 basis points.

However, because people are paying slower, the balances were still quite high and enabled us to have the income that was $2 million above last year.

So obviously, as we go to roll out this loyalty program, we're hoping to have a big impact on what's happened in penetration during the spring season.

And Kimberly, I think, just bridging what Karen just said about the loyalty program.

I think that's the right answer with respect to cosmetics.

So one of the things that we are most interested in seeing is how -- with the new loyalty program launched in October, how that affects our Beauty customer.

Because I think when you look at our competition, I give them some high marks on the loyalty program that they have, and I would say that ours was lacking.

And so one of the things that we wanted to make sure was that the loyalty program we are launching in October gave us the foundation by which we could speak to the Beauty customer with more authority.

So yes, certainly, the promotions that we have done to respond to competition in cosmetics has worked, but I would rather solve that by giving additional value through our loyalty program, and we're going to start to see the seeds of that in October.

And we'll take our next question from Bob Drbul from Guggenheim Securities.

Just a couple of questions.

On the digital and the improvement in digital, can you talk about Buy Online Pickup in Store penetration and ship from store?

How that's trended within your digital business?

And the second question I have is, I think from the June meeting, there were some discussion around a move to get more exclusive merchandise.

So I was just wondering if there are any updates or anything you could talk to on successes that you've had in that initiative?

Okay.

Let me talk about BOPS or Buy Online Pickup in Store.

So it really is 3-pronged.

The first one is making sure that you have a larger percent of your inventory in all of your doors that's congruent with demand that is online.

And now today, 25% of our entire digital demand could be satisfied in a door that is in zip code that is generating that online sale.

And so that is -- that gives us huge firepower opportunity to convert that to a Buy Online Pickup in Store if that's what the customer would like to do.

We love that because when they're in that store, they generally up-sell about 25% of additional goods.

The omnichannel customer is clearly a potent one when they buy in both channels, so all good things come from that.

So the first thing was having the inventory availability to do that.

The second piece of it was making sure then that you have a function on your mobile app or online that gives the opportunity for a customer to see all the inventory in an easy way in the store that is near them, and we essentially call it Shop Your Store.

So that has been in beta mode for us.

We are ready to launch that.

And that will give the customer really quick and easy way to be able to see what their local store has in their size, in their color.

And then the third thing that we worked on that is -- that will drive this penetration up through the back half of the year is changing the physical environment of the BOPS location in our stores and going from a tertiary location to a main #1 entrance, really put some assets against it, make sure that it is ready to go, that it's got staffing.

And so all those 3 things give us confidence that our BOPS penetration will grow through the fall season and -- that will be very customer-wanted.

Ship from Store, we're always looking at that last mile and the opportunity that it has same-day delivery in more and more Metro markets if a customer chooses to do that.

Once again, the same thing that I talked about with the first prong about BOPS about having available inventory the way that a customer is going to put together their order is the first step, and we've done that well, and obviously, increasing functionality and making sure that we have the logistics infrastructure in more markets.

We're checking all those boxes.

So that gives us the option to be able to do that for the customer in the back half as well.

And then I guess, your question was about exclusive.

They're working well.

I think that -- look, what I can see by Joyce Azria was one that we launched about 3 months ago, and that is doing very well.

We had the Anna Sui collection that is coming up for INC that launches in the fourth quarter that we have high hopes for.

We have many others that are all part of the private brand arsenal.

So what we told you in the Investor Meeting in June that we wanted to take the exclusivity quotient from 29% to 40% over time, we are on track with all of our work there with our Private Brands and our market partners.

And we'll take our next question from Lindsay Drucker Mann from Goldman Sachs.

I had 2. First of all, could -- handbags were not called out as an underperforming category this quarter.

I was just hoping for an update on what you're seeing there?

And then second, on your -- on the asset sale contribution to guidance, I just wanted to clarify, so you think that contribution from asset sale gains will be up.

Are you expecting some offsetting factors somewhere else in the P&L, which is why you're not raising overall guidance?

Or just help me understand the moving parts there.

Linda, if you think about it and we talked in June, we had talked about the gross margin risk, which we quantified and that we had planned to offset that between SG&A and the asset sale gains.

So all we are doing now is providing some color around that.

And obviously, there's a lot of the year yet to come, but there's no other change.

On handbags, Jeff may want to comment, but relative to last year that business has still been tough but it has stabilized, and it's pretty much as we had expected.

So that's why I wouldn't call it weak.

When a business performed as we expected and is stabilizing, that puts it into a different category.

Yes, Jeff, any color that you have on what you are seeing on handbags?

Lindsay, it's as expected.

So we're actually getting some green shoots in some of the regular priced products and in some of the new brands that we're bringing in, but it's as expected.

So it's not a strength, but I see good signs of life in that category.

And we'll take our next question from Brian Callen from Bank of America Merrill Lynch.

Karen, nice progress on the debt reduction year-to-date.

The premium on the debt repurchase was pretty modest again.

Did you repurchase additional 3 7s?

Or was it other notes?

You know what, I don't have that in front of me.

We'll call you back and give you that detail.

All right.

And then in the outlook comments, you mentioned the debt repurchase occurred earlier then assumed for interest expense.

I guess what drove this timing?

And then...

Just opportunities in the open market.

Okay.

And then do you maintain the sort of $100 million to $150 million pace in 3Q?

Or should we assume that, I guess, the cash seasonality would affect what we see in the back half?

I can't give you any forecast on what the timing might be.

It all depends on opportunity.

And we'll take our next question from Brett Levy from Loop Capital.

You said 10% of your customers account for 50% of your sales.

On the off-chance that maybe 5% of your customers account for 30% of your sales or 1% of your customers account for 20% of your sales.

Is the possibility to make kind of Macy's, like, a full experience.

Like, you can get your glasses there, get your appliances there.

There's a bar and a restaurant.

You can get your pharmaceuticals there.

Is there any way of kind of -- and you know where I'm going just conceptually.

Is there any way of taking that 10% that accounts for 50% and even further focusing it and being kind of the one-stop shop?

I think we're -- upon your point that Macy's is a very flexible brand.

And when you think about the owned businesses that we have, with the lease model that we have and the hybrid models that we have, we could be in more categories.

So there is -- we have high interest in taking care of the needs of our best customer, be that 10, 5 or 1. And the new loyalty program is really to address her.

The store experience and the stores owning those relationships with those individual customers, you can touch those customers that are still potent for our overall brand in ways through technology and customization, what we can do with our digital assets, in ways that we couldn't in the past.

We're not ready to comment if that means the categories that you're talking about, but everything is on our radar screen.

We are open to all opportunities.

In the spirit of your question about our best customers, we want to be her one-stop shop, and we believe we can do better with her over time.

And the follow-up is a simple one.

Since -- maybe there's an extra floor, maybe you could sell over a condo there?

I mean, this is more of a Brookfield-related question, maybe.

But is there any priority being given to the top 10 customers in terms of what you do with the extra real estate you potentially have as an asset?

Just I -- broadening on your point, the idea about us in looking at each of our assets because they're all unique, we have an opportunity to make sure that we're monetizing every one of these unique properties to make sure that we're maximizing shareholder value.

So we're going to take great care in doing that.

And we'll take our next question from Kara Szafraniec from Northcoast Research.

Quick question on the fine jewelry initiative.

Hoping maybe you could give us some color on which categories of fine jewelry are performing best, maybe some average dollar value transaction color?

And finally, how is the fine jewelry initiative impacting total jewelry margin?

What I would say is that there's -- each of the categories within, when you're talking double-digit increase, everything is playing across the whole fine jewelry categories.

But one particular note is really what's going on right now in diamonds.

And a lot of that is because the strategy isn't just about product, it was also about environment, it was about salesmanship, it was about management, it was about training, it was about marketing.

So when you look at that, our opportunity to sell better quality diamonds for someone who is starting their engagement journey with us, that was one of the places that we really wanted to make sure we were relevant.

So we put focus on that.

We really built a lot around that, and the rest is doing well for us.

So what I would say to you is that there is -- our efforts are really focused on the full jewelry customer.

So it's not just in fine jewelry, it's also in bridge jewelry, it's also in fashion jewelry.

It's in watches.

It's in fine watches.

So if you can establish a beachhead with a particular category that customers really want.

And then once they are in, they'll buy other categories.

That's how we are looking at it.

We do that through our own brands.

We do that through our market brands.

And we'll take our next question from Dana Telsey from Telsey Advisory Group.

As you think about the second half of the year and holiday plans, whether it's hiring and the changes you're doing in marketing, how is that investment, hiring, marketing, different this year than last year?

And then with the vendors and flow of product, more buy now, wear now, what are you seeing in arrivals of goods, timing, that's different than it had been in the past?

So what I'd say is that we're more efficient in our marketing spend than ever because of what we're doing with weight and buys -- and Rich Lennox, who you had an opportunity to meet at the Investor Meeting, and the leadership that he's bringing to this subject.

So expect us to be very promotional, but we are also going to be -- we have the available dollars now because we are more efficient in our promotional marketing to be able to focus on those things that make Macy's stand out as a gift and fashion destination.

So expect those parts to be in more balance during the fourth quarter.

So -- and then to your question about inventory, we definitely are buying closer in.

So the opportunity to flow closer in is a priority of ours.

So to make sure that we have the right goods in time for holiday, but not too far in advance and to make sure that our December receipts are really focused on the transitional opportunity for Christmas vacation into the New Year.

So we're really focused on freshness and making sure that our inventories are bought closer in to customer demand and expect us to get better of that, and you'll see a marked difference this holiday versus last.

And we'll take our last question from Lorraine Hutchinson of Bank of America.

Karen, can you just reiterate your back half comp guidance?

I think there was a little bit of confusion about that.

Sorry.

Yes, the guidance have been -- in order to get to minus 2 to minus 3, mathematically for the fall that would be minus 0.8% to minus 2.6%.

So I think that's the back half guidance.

We were trying to give some color around expectations for the third quarter.

And you'll recall in June, we had said we expected Q2 to be better than Q1, Q3 better than Q2, Q4 better than Q3.

With Q2 being better than what we had expected, I was just cautioning that Q3 may be close to Q2 or slightly worse.

And then you have to decide your outlook for the fall as to what that could mean for the fourth quarter.

Does that help?

Or am I still confusing you?

No, that helps.

And I just wanted to follow up on the loyalty program.

I know you're not giving a lot of details yet, but are you confident that launching it in October will give the customer enough time to learn what it means and be able to really use it for the important holiday-selling season?

We believe that it's a good time to be launching it.

But we also know that it takes a long time, roughly 18 months, for a loyalty program to really reach its stride.

So we do not expect to get the full benefit of the loyalty program in the fourth quarter, but we hope that we will begin to see that happen.

And that concludes today's question-and-answer session.

Wonderful.

Thanks, everybody, for your interest and support.

Take care.

Bye, everybody.

This concludes today's call.

Thank you for your participation.

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