Macy's Inc M
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/26/2013

Operator: Good day, everyone and welcome to Macy's Incorporated Fourth Quarter Earnings Release Conference Call. Just a reminder, today's call is being recorded.

Now it's my pleasure to turn the conference over to your host, Karen Hoguet. Karen, please go ahead.

Karen M. Hoguet - CFO: Great. Thank you, and good morning. Welcome to the Macy's call scheduled to discuss our fourth quarter and full year 2012 performance and to outline our key planning assumptions for 2013. 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 affects the Company, including the risks specified in the Company's most recently filed Form 10-K.

As you saw a few weeks ago, we ended 2012 very strongly with an outstanding January sales performance, which was far ahead of our expectations. We actually made up much of the November, December shortfall and achieved a 3.9% comp growth in the quarter, just short of our original guidance. It was a good quarter and a very good year. In fact it was the third year in a row in which we produced very strong sales, profit, and cash flow. We are clearly operating on all cylinders.

When we reorganized the Company in 2009, we began installing much more of a growth culture that is now beginning to take hold and our strategies are being executed very successfully. Our three key strategies are still what we affectionately call M.O.M. I'll talk more about each of these later on the call, but just to list them now. The first My Macy's; this was actually our fourth holiday season since putting the My Macy structure in place. We continue to build on our success and find new ways each year to satisfy customers through greater localization. This is so critical and frankly it cannot be emulated by the competition.

The second key strategy the O in M.O.M. Omnichannel; this strategy offers so much opportunity for us. We have been building these capabilities for years, and yet there is so much more to come on this subject. Three, the last M, magic selling, we are improving the selling capabilities of our store associates. We are also empowering more local decision making.

The momentum continues to build and we have a very long runway in front of us. Sales in the fourth quarter were $9.350 billion up 7.2% over last year. But remember part of this is due to the extra week in the 2012 calendar. On a comp basis with the same number of weeks, the fourth quarter sales were up 3.9% over last year. The categories of business that were strongest in the fourth quarter, were handbags, watches, shoes, women's suits, Active, men's overall, home textiles, luggage and furniture and mattresses. The weaker businesses were housewares and juniors. Private brands also had a good quarter with particularly good growth coming from the Millennial classic apparels and home textile brands.

Geographically we performed best during the quarter in our southern markets as well though as some markets in other parts of the country such as Western New York, Oregon and Colorado. Bloomingdale's had a decent quarter especially considering the fact that the Bloomingdale's stores were disproportionately hurt by Sandy given their geographic footprint. Average unit retail increased approximately 4% in the fourth quarter with transactions up about 1% and units per transaction down about 1%. As anticipated, the increase in AUR did moderate in the back half of the year and we were very pleased though to see the number of transactions increase.

Sales transacted over the Internet were very strong up 48% in the quarter on a comp 13 week basis. We are very pleased with how both Macys.com and Bloomingdales.com are helping us to both grow our customer base and also to increase spend with existing store customers. We are benefiting from very large increases in traffic on the websites but also in conversion. The increase in conversion is particularly encouraging given the growth in mobile traffic where conversion does tend to be lower than on desktops. More on this later.

Gross margin in the fourth quarter was 40.6%, down 40 basis points versus last year. Merchandize margin was up slightly in the quarter but the success of our omnichannel approach with the shipping costs impacts our reported gross margin. Inventory at year end was up 3.3% on a comp basis. This increase is below our first quarter expected sales. It might though be a little bit higher than what you had expected. This is because of a conscious decision to bring in more transitional merchandize into our stores, so that they would be fresh for post-Christmas selling. We believe in fact that this was a key factor behind the success in January. SG&A expenses were $2.4 billion in the fourth quarter or 3.7% above a year ago. We benefitted in the quarter from higher credit income, which was $44 million favorable to last year. This was more than offset by increased spending to fuel omnichannel sales, the expense for the 53rd week and $16 million higher in pension and serve expense. But as a percent of sales SG&A in the quarter improved 90 basis points, which more than offset the lower gross margin rate.

Operating income excluding store closing cost and impairments in the quarter was $1.396 billion or 14.9% of sales. This is up 11% over last year or as a percent of sales up 50 basis points. Store closing cost impairments and gain of sale of leases were a loss of $5 million this year as compared to an income of $25 million last year.

Interest expense was $106 million in the quarter and we booked an additional $133 million in the quarter related to the debt tender that we completed in November. The tax rate in the fourth quarter was 36.6%, approximately the same as last year.

Net income excluding store closing cost impairments and the interest expense associated with the tender was $818 million. Average diluted share count was 399 million shares and EPS on this basis was $2.05 up 21% over last year on this basis. Including the store closings, impairment and the tender premium EPS in the fourth quarter was $1.83.

The full year's results are actually quite similar to those in the fourth quarter. Comp store sales increased 3.7% for the year. We had a slightly lower reported gross margin rate due to the impact of free shipping. We had good SG&A rate improvement, lower share count due to the buyback, all similar to the fourth quarter. When you put all of these factors together for the full year, operating income was 12% above last year, excluding store closing costs, impairments and gain on the sale of leases. As a percent of sales, EBIT on this basis increased 60 basis points. EBITDA as a percent of sales for the full year was 13.4% up 30 basis points over last year. Return on invested capital was 21.2% up 50 basis points over last year.

Cash flow from operations net of investing activities was $1.4 billion and we utilized $1.35 billion of cash to buyback to 35.6 million shares in 2012 and we also doubled our quarterly dividend to $0.20 a share. EPS grew 20% over last year excluding store closing cost impairments, the gain on the sale of leases last year and the debt tender. Our EPS on this basis was $3.46, which compares to our expert's expectation that we said at this time a year ago of $3.25 to $3.30. We are very happy with these results. The consistency of our strong sales growth combined with improving profitability over the past three years is something of which we're quite proud. As we look back on 2012, it was a big year for the Company. In addition to it being the third year of very strong financial performance, we made some big steps strategically that are positioning us well to continue our good performance in the future.

Let's go back to those three key strategies M.O.M. First, My Macy's; in 2012, we instilled renewed energy into My Macy's by simplifying some of the processes and executing some very successful strategies including warm weather, latino, a small store prototype and what we call extreme growth doors. Each of these and there are more would convince you I think, that we will continue to gain benefits in future years from this focus on localization. This organization and the processes we've put in place that enable us to localize our offering are truly giving us a sustainable competitive advantage.

The second strategy, omnichannel. In the fourth quarter, we saw the beginning of the enormous opportunity in front of us from approaching our business from an omnichannel perspective. We are working to provide our customers with seamless experiences no matter how they choose to shop with us and to utilize the strengths of each channel to satisfy demand and serve as the customer needs better than we could if we didn't operate multiple channels. It is really exciting and our team is embracing the new possibilities and working very hard to improve our capabilities and maximize the opportunities. One area on which we are focusing lots of resources is how the best optimize the use of warehouses and our stores in an ever changing fulfillment environment.

As you know we are filling many items that are ordered in our stores from the inventory either from other stores or from our online fulfillment centers. At the same time we began in 2012 to fill orders that are entered online out of inventory in our stores. We currently have 292 stores enabled to fulfill goods, up from only 23 a year ago. By the fall of this year, we expect to have a total of approximately 500 stores fulfilling orders. We're finding that customers don't really care from where we pull the goods, as long as we fill the order accurately and the delivery is timely. We've built algorithms to help us determine from where to pull the inventory and we are learning more each day about how we need to refine these formulas. We are really just scratching the surface here. In fact, in the future we expect these fulfillment locations will be key to offering faster and even same day delivery and also will enable the customer to buy online and pickup in store.

Our omni-channel initiatives extend far beyond fulfillment. We are busy improving both our website and our mobile app to make shopping easier and faster. We are taking new approaches to marketing that utilize digital technology and benefit from utilizing a 360 degree view of our customer's shopping behavior with us. We are collaborating on our merchandize strategies between the channels. This is all very exciting. But remember it all starts for us with great product and a great in store experience. Our merchandize acumen and our ability to run great stores are central to our omni-channel success. The line between stores and the internet is blurring so much that beginning in 2013 we are no longer going to break out our internet growth when we report our results.

The third strategy, the final M, magic selling, we are focused on training and coaching our associates to improve our engagement with the customer and our selling skills. Our Net Promoter Score keeps improving indicating to us that progress is being made. We are also working hard to encourage our store associates to think omnichannel. This means selling customers merchandise that may in fact not be in that store, whether it be out of stock or not even carried in that particular location. It also means embracing the customer making a return. These changes aren't easy, but we are working hard to make them happen.

We also began in 2012 to formulate our Millennial strategy, which includes Active. Active as you heard me mention a few minutes ago was one of our best performing categories in the fourth quarter. As we move to 2013, we believe that will continue to build. The finish line partnership is bringing added creditability to Macy's as a destination for this category, and we are very excited about the very early results in our first store that converted.

We are feeling very good about our strategy and the assortment that the Millennial customer is going to start seeing later in 2013. We are particularly excited about our product offering for the older Millennial customer what we call impulse, which is a customer for whom we frankly have not had as much to offer in the past. By the end of 2013, we expect to have launched 13 new Millennial brands at Macy's and expanded 11 existing Millennial brands. We believe we are laying the framework to make this a very important source of growth for us in 2014 and '15.

So let's now move on to our outlook for 2013. As I have said repeatedly, we feel great about our strategies and the momentum with which we're entering the year. Our key planning assumptions for 2012 are pretty straightforward. One, we are assuming an annual comp increase of approximately 3.5% for the year on a 52 week against 52 week basis. I should mention that it would approximately 30 basis points higher were it not for the conversion of the athletic shoe business to a leased operation.

While there are lots of calendar shifts by month this year, resulting from the facts that 2013 follows a 53rd week. There is really only one major calendar shift between quarter, but it happens to be between the first and second quarter. Due to the timing of promotional events and how they fall in this year's fiscal calendar, our first quarter is planned 2 to 3 points higher than the second quarter. We are opening three Macy stores in 2013, one in Gurnee Mills outside Chicago, one in Victorville, California, in Southern California, and a replacement store in Bay Shore on Long Island.

We're also expanding our Las Vegas fashion show store for Macy's by adding a new box, which will offer an expanded men's offering. We're also opening a Bloomingdale store in Glendale in Southern California and one Bloomingdale's outlet store outside of Chicago. Total store sales growth is expected to be approximately the same as comp growth for the first three quarters of the year. But remember the fourth quarter will have one less week than it did in 2012. So as a result, the total sales growth for the fourth quarter is assumed to be approximately 330 basis points below the comp growth in the fourth quarter.

For the year as a whole, that difference should be approximately 120 basis points but again its all happening in the fourth quarter. Net-net we are assuming an operating income rate increase in 2013, but I have to say that it is getting more challenging as our profit level rises, plus building our omni-channel capabilities requires an investment and these transactions do require higher incremental expense which as you know grows into gross margin due to the shipping costs. We are still committed to and very much focused on exceeding the 14% EBITDA target rate in the near future.

We are assuming flattish to slightly down gross margins given again the expected growth in omni-channel transactions. So we assume that we will be able to continue to leverage our SG&A and improve its rate offsetting any reduction in gross margin rate. Included in the SG&A are the following assumptions embedded for 2013. Credit income is assumed to be approximately $10 million to $15 million better than 2012 in 2013. We are expecting about $10 million less in depreciation and amortization than in 2012 and our retirement expense including the 401(k) match is assumed to be approximately $5 million higher in 2013 than 2012.

We are assuming interest expense of approximately $395 million and a tax rate for the year of 36.95%. We've budgeted CapEx for the year at $925 million and expect to make $150 million pension contribution during the year. Embedded in our guidance is our ongoing stock buyback program. As you saw, the EPS guidance is $3.90 to $3.95. This would represent a 13% to 14% increase in EPS over 2012.

So that's an overview of our 2012 performance and our outlook for 2013. Just to give a little bit of perspective, consider how far we've come over the past three years. Since 2009, we've added over $4 billion to top line sales. We've added more than $1.2 billion to operating income and as a percent of sales operating income increased 340 basis points to 9.6%. We've increased the return on invested capital to 21.2%, 630 basis points over the 14.9% in 2009. Our earnings per share grew from $1.36 in 2009 to $3.46 in 2012 or on average 36% per year growth. As we have said repeatedly, we have a very long runway ahead of us for further improvement. Within this strategic framework that has been so effective in revolutionizing our business.

You see this reflected in our 2013 guidance. If was to pick two words to describe Macy's Inc. today, they would be confident and determined, our very talented people continue to be very excited about what lies ahead. We hope that you too share our enthusiasm for the prospects and our vision. Now I'll take your question.

Transcript Call Date 02/26/2013

Operator: Deborah Weinswig, Citi.

Deborah Weinswig - Citi: Congratulations Karen on a great quarter and a great year. Can you talk about how the Millennial strategy has changed the rest of your women's business and how you think about women's in the future?

Karen M. Hoguet - CFO: I think it's early Deb. Just as I said bringing many of these brands in this year, but we do believe this is a customer we didn't previously serve and we think it will be very helpful. We also think by the way that some of us are older, or at least I won't speak for you, I'll speak for myself. Older customers may also like these Millennial assortments. So I think it's going to be very exciting addition to our ready-to-wear floor.

Deborah Weinswig - Citi: Then we are seeing many of your competitors or other department store retailers making big investments on the technology side, yet, you are guiding for SG&A improvement and also we are not seeing a huge step up in CapEx or tech. Can you talk about how you are approach has been different over the past few years and why you are positioned for SG&A leverage in the future?

Karen M. Hoguet - CFO: Well we are investing just as aggressively, than I think any of our competitors. We are trying to be balanced and we think that that's possible in this environment and again with the sales growth being so high we are able to lever the SG&A.

Deborah Weinswig - Citi: Then last question, you have been one of the pioneers in RFID. Can you talk about how you are utilizing that technology and what we should expect going forward?

Karen M. Hoguet - CFO: Yes. I think our two priorities relating to RFID, the first would be replenishment and by the fall we are hoping to have roughly half of our replenishment business utilizing RFID. Our stores will all be enabled by early in the fall and we are just waiting as the vendors come up and begin to tag the growth. But replenishment is roughly 30% of our business, so this could be very important as we go forward. The second key priority with RFID is related to our store display. We interestingly started this at Harold Square in the shoe department where we used RFID to be able to audit the shoes on display on the floor because as you imagine they get moved a lot during a day and it's been extraordinarily successful. We have rolled it out now to all of women's shoes across the Company and next up to do the same – utilize the technology the same way will be luggage and men's shoes, which will be up this summer.

Operator: Jeff Stein, Northcoast Research.

Jeffery Stein - Northcoast Research: Wondering if you could talk a little bit about, again going back to the Millennial strategy, reconcile kind of the weakness in Juniors with your optimism with and I know Juniors is only a piece of Millennial, but you are reconciling that with your optimism on the Millennial strategy. Wondering if you've tested any of these new brands that are going to be rolled out and what kind of a reaction you've seen by the customer if you've tested?

Karen M. Hoguet - CFO: Jeff, we test most everything that we do, but I am not up to date on specific tests vis-a-vis the brands, but we did a lot of research and testing as we developed them. So I am sure that that is happening as we speak. If you think about the Millennial strategy, as I said earlier, that older Millennial is where we saw white space. So we are really focusing a lot of attention on that customer. That's also a customer who is going to buy lots of merchandize beyond apparel. As you know, we've rolled out our Impulse cosmetics areas. Also Impulse is an important part of our shoes strategy and other accessory areas. So all of that is in play and again we've talked about Active.

Jeffery Stein - Northcoast Research: Finally with rolling out to store fulfillment from online to 500 stores by fall, do you feel comfortable that you've got the store labor situation under control and are you able to still leverage your store payroll with the, I presume, the increase in hours required to service that omnichannel customer.

Karen M. Hoguet - CFO: The answer to that question is yes. Our stores team have done a spectacular job of doing this fulfillment very accurately, on time and budgeting accordingly. So, we feel very confident in our stores organization ability to do this.

Operator: Paul Swinand, Morningstar.

Paul Swinand - Morningstar: Just wanted to drill down a little on the online and the margin. I know you've talked about free shipping and some impacts to gross margin, but as you shipped more to mobile and as it continues to evolve, could it actually be better for gross margins. People buying more items, is it higher AUR, they're more full priced I guess.

Karen M. Hoguet - CFO: Well, historically that's all been true, but candidly it's getting so hard to know what's the store sale and what's the mobile sale and what's internet, but over time we do hope to have a higher merchandise margin to offset some of those costs. But I think that's further down the road.

Paul Swinand - Morningstar: Is the mobile customer accelerating some of those trends or losing many. I guess I would speculate that mobile customers once convenience and will buy it quickly and maybe more at full price.

Karen M. Hoguet - CFO: I wouldn't speculate that.

Operator: Bob Drbul, Barclays Capital.

Robert Drbul - Barclays Capital: The first question I have is in your assumptions for '13. I know you're going to stop providing the online growth, but can you just tell us how much online growth is assumed? Would it be higher or lower what you have experienced this year?

Karen M. Hoguet - CFO: As I said it's getting harder to figure out the lines between them. So, I really can't give you that number. I don't know it, but clearly the growth is continuing very aggressively. But sometimes it's being bought on a mobile device sitting in s tore. So I am not sure how to define that.

Robert Drbul - Barclays Capital: On the 292 stores that you have, omni-channel stores, can you talk just a little bit about some of the learnings from that and any changes being made as you go up to the 500 stores fulfilling orders?

Karen M. Hoguet - CFO: It's a lot of detail going into this and I really don’t know all of them but clearly the stores have compared best practices and are trying to do that. One of the early learnings was that we had thought we would have special purpose people doing the fulfillment activity and we discovered that we were better off using the support associates that we had because they better understood the merchandize. People who were putting merchandize on the floor are going to find it much quicker if they understand it. So we did change the staffing model some, but there is a lot of detail to go into this and our store operations group is just doing a terrific job as I said rolling out best practices.

Robert Drbul - Barclays Capital: Then my last question is can you just talk a little bit about the cold weather category sort of how you have come through that and sort of your experience there over the last several months?

Karen M. Hoguet - CFO: Well January was good if you recall in cold weather but for the fall season as a whole it was another disappointing cold weather season .We thought that wasn't possible after 2011 but it happened again in 2012.

Robert Drbul - Barclays Capital: Your inventories I mean is everything sort of cleaned up at this point as you move forward?

Karen M. Hoguet - CFO: We will be back certainly consciously help goods over because as you know the cold weather is still here. We had done that last year and it was very successful. Sometimes we clear our floors too early and so we have kept some of the cold weather merchandize on the floors to continue to be able to sell now. But we don't see any liability in terms of future markdowns.

Operator: Matthew Boss, JPMorgan.

Matthew Boss - JPMorgan: About a year ago, we sat down at headquarters and talked about My Macy's, MAGIC Selling, Door to Store, all really in early innings. What would you say over the past year, what's been your largest learning? Then looking forward, what do you think the largest opportunity is?

Karen M. Hoguet - CFO: So hard question. I think the learning has just been – there's so much more to learn. There's still so much more we can do with My Macy's and every year, we find new things. We are working with our vendors and MMG to specialized product even more for customer groups, geography, stores. Omnichannel obviously is a huge opportunity in front of us, as we integrate our strategic thinking more across channels. MAGIC Selling, again it's on a trajectory to keep improving the level of service we are giving to our customers. So I think the biggest learning is just how much more we have to accomplish.

Matthew Boss - JPMorgan: As you look forward, the continued merchandise margin improvement this quarter was encouraging. Can you speak to where we are at today versus prior peak? Then how should we think about Door to Store and what this could be, what kind of opportunity this could be to gross margin going forward?

Karen M. Hoguet - CFO: Our merchandise margins are at historic peak. The question on the table is through this optimization of inventory, is there more potential through and we have to see from there. So we do expect there to be some improvement in merchandise margin as we go forward, unclear if in '13 if it's going to offset the added delivery cost associated with omnichannel, as I said earlier. It very well may. But jury is still out.

Operator: Paul Trussell, Deutsche Bank.

Paul Trussell - Deutsche Bank Research: First just to clarify your comments earlier on the top line. The first quarter we should expect same store sales to be 2 to 3 points above the second quarter.

Karen M. Hoguet - CFO: That's correct.

Paul Trussell - Deutsche Bank Research: But roughly about 3.5% for the first half.

Karen M. Hoguet - CFO: 3.5% for the year, but I don't see a lot of deviation beside that first and second quarter.

Paul Trussell - Deutsche Bank Research: Then regarding your cash, certainly you have a lot of – what should we expect from a share repurchase standpoint in '13, should it be a similar amount to what we saw in 2012?

Karen M. Hoguet - CFO: We don't comment on guiding to the amount of stock we're going to buyback. As we've said that is what we use our excess cash for, but how much we actually buyback depends on the price of the stock, depends on the cash being generated from the business, market conditions, et cetera. But we've said that that is what we're going to use our excess cash for.

Operator: Lorraine Hutchinson, Bank of America Merrill Lynch.

Lorraine Hutchinson - Bank of America Merrill Lynch: Karen, I was just wondering if you could give us updated thoughts on the capital structure and if there is an opportunity to perhaps borrow to further fuel the buyback program this year.

Karen M. Hoguet - CFO: That's always an opportunity. I think as we've said in the past our credit rating is very important to us. We had set credit ratios a couple of years ago for debt-to-EBITDA and EBITDA to interest and we still are living by those targets. So in 2012 we hit the low end of the debt to EBITDA target. So again there is still potential to raise incremental debt in '13 given the improvements in the EBITDA. But we are working to maintain or even increase our credit rating as it is today. But that doesn’t preclude increasing the debt levels some.

Lorraine Hutchinson - Bank of America Merrill Lynch: Then looking at your $925 million of CapEx guidance is that a good longer term run rate or will we see that taper off as you complete more of the flagship renovation in outer years?

Karen M. Hoguet - CFO: I would not expect it to taper off and I think the unknown is whether or when we might build another mega center which might cause that CapEx to go up over the $925 million somewhat in a year when we build that. But we don’t know that yet. But I would not expect it go down over time.

Operator: Michael Binetti, UBS.

Michael Binetti - UBS: So I was wondering, if you could just talk to us a little bit about the store to door, maybe ask the questions little bit differently. But can you talk a little bit about the cost profile initiative and if it’s a drag to margins beyond what we have seen in the past for e-commerce sales fulfilled from a warehouse and has that profile changed as you started to scale the business up I guess?

Karen M. Hoguet - CFO: I think the key thing to focus on is the improving margins we are talking about. It's so hard to define profitability by these individual transactions and allocate everything. If I were you I would just focus on the fact the operating income is expected to continue to increase as a percent of sales.

Michael Binetti - UBS: Is that a function of scale – I mean I think you are one of the only ones that we can clearly say it feels like as your internet scales, it's really becoming a contributor to the profitability, I mean 9.6% operating margin is…

Karen M. Hoguet - CFO: It's always going to be contributor to the business.

Michael Binetti - UBS: Maybe if you think about the comp guidance for the year and maybe the components that went into it as you built it, AUR has been coming down a little bit each quarter. Will 2013 be more transactions and unit growth than 2012 was? Is there any changes to the way you plan the business differently with that being said?

Karen M. Hoguet - CFO: I think we expect the AUR increase to be similar to what it was in the fall.

Operator: Kimberly Greenberger, Morgan Stanley.

Heather Balsky - Morgan Stanley: Hi Karen, this is actually Heather Balsky on for Kimberly. I was wondering if you could just talk about some of your other strategies and the progress that you've made, in particular the price optimization, and also your focus on sort of leveraging your store based to sort of due I guess, showcase the items in the store, but only ship from online?

Karen M. Hoguet - CFO: That's part of the omnichannel work. We've done a lot of experimenting this year with goods that are in the stores for which we don't have inventory backing it up. A lot of those initiatives have done very well. We've also experimented with putting merchandise online that we don't have inventory in the online warehouses, the inventory is only in stores. In the fourth quarter, we had about 700 items that we tested this with very successfully. So we will continue to roll out and do more of showing goods on line that we are not keeping in the online warehouses, which is a great thing for the customer and also is good from a profitability perspective because these are typically good because economic don't do so well in big warehouses. So, we continue to be very excited about that. In terms of price optimization, I think that's proven to be lot harder than we had expected it to be, and we're still working on how to optimize pricing across the Company, but that has not been as easy to do as we had hoped early on.

Operator: Liz Dunn, Macquarie Capital.

Liz Dunn - Macquarie Capital: Congrats on a great year. I guess my question is about Bloomingdale's. Would you just share a little bit more information, I know you said that they did pretty well in the quarter, but how are you feeling about their specific merchandizing strategies and their outlook for 2013, and then also an update on Bloomingdale's outlet?

Karen M. Hoguet - CFO: I would say Bloomingdale's is doing well relative to its peer group, and we feel pretty good about it. It was a tougher year in 2012, but it was a really strong year in 2011 and when you put it together, we feel good about their merchandize strategies on what they had for Bloomingdale's in 2013. They very successfully launched the Loyalist, the new loyalty program, last year at Bloomingdale's. Again, they just continue to make progress. On the outlets, I would say they continue to refine this strategy and work on it to improve it, that's why you don't see us adding a significant number of outlets yet, but we expect that to start happening very shortly.

Operator: Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group: So I can definitely tell the thought that's going into fulfillment and the channel convergence that's occurring. How do you think about the labor costs involved in fulfillment? Is there any update on mobile? Are the margins as you see long term, the margins as a combined business do they have the opportunity to move higher with the labor costs that are involved?

Karen M. Hoguet - CFO: Yes. I mean as we have said, we are marching up to exceed that 14% EBITDA rate and a lot of that is being driven by these omni-channel transactions. So we feel very good about the profitability of the business going forward.

Dana Telsey - Telsey Advisory Group: How many fulfillment centers do you think there can be over time?

Karen M. Hoguet - CFO: In the store?

Dana Telsey - Telsey Advisory Group: Yes.

Karen M. Hoguet - CFO: Well we are going to have 500 up this year which represents about 85% of our business. So a significant number and we may increase it from there.

Dana Telsey - Telsey Advisory Group: Is mobile having an impact, Karen, are you seeing that?

Karen M. Hoguet - CFO: Well mobile is clearing becoming more important, whether it be tablets or smartphones and so we are spending a lot of time developing on mobile apps working on those to make them easier to use both the shop and also for information.

Operator: Bernard Sosnick, Gilford Securities.

Bernard Sosnick - Gilford Securities: Could you speak a little bit about the trends in women's apparel and amplify a bit on the success in Activewear?

Karen M. Hoguet - CFO: Yes. I would say overall women's apparel has continued to be tough. Every month or so we see some light at the end of the tunnel, but it really hasn’t overall produced that well. As you heard, we had a good fourth quarter in women's suits, dresses has been improving. Some of the classic private brands did very well in women's apparel. But overall, the numbers have not been as strong as the rest of the store. Now, the Impulse business which will be on a ready-to-wear floor part of the Millennial, we think is going to be helpful and hopefully, all of those will rise and women's apparel will do better as we get into the fall season.

Bernard Sosnick - Gilford Securities: Could you amplify a little bit on the success in Activewear that you noted?

Karen M. Hoguet - CFO: I am not sure what you mean.

Bernard Sosnick - Gilford Securities: I thought you said that Activewear performed particularly well.

Karen M. Hoguet - CFO: Yes, it did, both in men's and women's. We think that the Finish Line addition will also help drive that business even further.

Operator: David Glick, Buckingham Research Group.

David Glick - Buckingham Research Group: Just to follow-up on the category trends, clearly accessories has been a big driver for the last few years, are you seeing signs of any loss of momentum there and are you still planning that as one of the key areas i.e., Center Core? Then secondly, if you can give us a little more detail on how the CapEx breaks down, how much is going to be Herald Square and some of the learnings you have from the transition you went through this year and what you've applied to maybe minimize disruption this year?

Karen M. Hoguet - CFO: In terms of the accessory Center Core business is they continue to be very, very strong and we expect that to continue in 2013. In terms of the CapEx budget, it's really very similar to this year. Remember Herald Square was going to be about $400 million over four years. So it's still going to be a significant chunk of the capital in 2013. We are thrilled that parts of the store now opened, which are helping to offset some of the disruption. The women shoe floor has been doing spectacularly and the jewelry areas are doing better and better, now that the first floor is the Luxe shops opened. But the first floor if you've been over there lately, it's still very disruptive, both in the cosmetic side and also the men's side. So that disruption will continue. I am not up to date David on all the learning's, but I'm sure that the Herald Square team learned a lot last year about how to minimize the disruption and they're doing everything in their power to do that, but there still will be disruption this year.

David Glick - Buckingham Research Group: Are you pleased on the handbag side of that first floor as you are with the shoe area upstairs?

Karen M. Hoguet - CFO: The first floor has been a little harder to read because not everything is complete and there is still disruption. The shoe floor is completely done, so it's easier to read. But we are pleased with all of the areas that have been completed so far.

Operator: Wayne Hood, BMO Capital Markets.

Wayne Hood - BMO Capital Markets: Couple of questions. Can you give us some sense of what percent of your sales are tied to free shipping and what's embedded into the guidance? Is there any particular product classifications that are tied more to that?

Karen M. Hoguet - CFO: I don't know the specific percentage, but the transactions are happening out of store and also the online order. So it is obviously becoming a bigger percentage of the business. But don't forget the lion share of our business is still what I would call plain old store sales. A lot of growth and the attention is on dotcom and this omni-channel area which is absolutely helping us tremendously in terms of growth. But the lion's share of our transactions, are still where I would call an old fashioned retail sale.

Wayne Hood - BMO Capital Markets: My last question I guess was just a discussion around credit. I think it will come – at the end of the year you thought credit income would be about $610 million. I am just wondering where that landed and kind of what's embedded in your guidance for credit income in the coming year and is there any nuances quarter-to-quarter as you adjust kind of the income coming in?

Karen M. Hoguet - CFO: Well credit this year the income is about $663 million which is obviously better than what we had expected at the beginning of the year. It was a combination of good performance of the portfolio but also credit sales grew more than what we had anticipated earlier in the year. As we look to the guidance for 2013 we are expecting that income to still go up but only by about $10 million to $15 million. So getting less so year-over-year in 2013 but still a positive.

Operator: (Priya Ohri-Gupta), Barclays Capital.

Priya Ohri-Gupta - Barclays Capital: I was hoping you could speak a little bit more about your credit ratings objective. You discussed of holding ratings at the current level or looking to improve, should we now think of high BBB as a potential objective or is it just getting to mid-BBB ratings across all three agencies?

Karen M. Hoguet - CFO: Well we have said repeatedly we had like to be mid-BBB. But given the strength of the business and the cash flow we could easily find ourselves above that. But our target has been to be a strong mid-BBB rating.

Priya Ohri-Gupta - Barclays Capital: So if you find yourselves above the mid-BBB, should we expect that you would come back down or will it be up over time?

Karen M. Hoguet - CFO: I can't say that.

Operator: (Donald Palmer, Discovery Capital Management).

Donald Palmer - Discovery Capital Management: Your primary department store competitors had a challenging 2012 with the most challenged competitor handing over about $4 billion in sales to Macy's and others. Can you give us a sense for how much that dynamic contributed to Macy's 2012? If you could just help us quantify or factor in how much of that you factored in terms of your 2013 guidance, did you assume a similar competitive tailwind or something else?

Karen M. Hoguet - CFO: I really can't comment on that.

Donald Palmer - Discovery Capital Management: On either of the 2012 or 2013 guidance?

Karen M. Hoguet - CFO: Either one, I mean, as you know, it's obviously helped us in '12, but remember, the overlap between customers isn't a 100% and so there's a lot of our customers that are well above shopping at Penney.

Operator: That is all the questions we have at this time. Ms. Hoguet, I would like to turn the program back over to you for any additional or concluding remarks. Ma'am?

Karen M. Hoguet - CFO: So that's it. Thank you all very much, and if you have additional questions, just either call me, Matt or Sarah and we will do what we can to be helpful today. Thank you.

Operator: Ladies and gentlemen, that does conclude our conference for today. I would like to thank everyone for joining us and wish you a good day.