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Federated Department Stores (FD)

Q1 2006 Earnings Conference Call

May 10, 2006 10.30AM

Executives:

Karen Hoguet, Chief Financial Officer

Analysts:

Deborah Weinstein, Citigroup

Dana Cohen, Bank of America

Stacy Turnof, Merrill Lynch

Jeff Stein, Key Bank Capital

Christine Augustine, Bear Stearns

Adrian Shapiro, Goldman Sachs

Bernard Sosnick, Oppenheimer

Bob Debral, Lehman Brothers

(David Glick?), Buckingham

Michelle Tan, UBS

Presentation

Operator

I'd like to thank everyone for holding and welcome to today's FDS conference call, with Ms. Karen Hoguet. Operator instructions. Ms. Hoguet, I'm going to turn the call over to you, and thank you for using our conference center, Ma'am.

Karen Hoguet, Chief Financial Officer

Thank you. Good morning, and welcome to the Federated Department Stores call scheduled to discuss our Q1 earnings. I am Karen Hoguet, CFO of the company.

Any transcription or other reproduction of the statements made on this call without our consent is prohibited. A replay of the call will be available on our website, www.fds.com beginning approximately 2 hours after the call concludes. Please refer to the investor relations section of our website for discussion and reconciliation 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 effect the company, including the risks specified in the company’s most recently filed form 10K and form 10Q.

We are very pleased with our performance this quarter, and with the fact that the May company integration is right on track. But while we all feel good we also realize that we still have some major integration work ahead of us. During this call this morning, I will talk about the quarter and our thought regarding the rest of the year, and then as always I will open the call for your questions. Our EPS excluding May-related integration costs and inventory valuation adjustments were $0.02 in Q1 as compared to our expected loss of ($0.15 to a loss of $0.05?). Most of the reason for this positive variance related to the transitional issues that were beneficial to the quarter but will not benefit us to the same degree going forward, as I'll discuss in a minute. However, we were pleased with the underlying sales trend in the Macy's stores, which is an important indicator of our performance in the future.

This is important, because as you know it is the Macy's strategy that will be executed in our new May doors starting this fall. The transitional issues that benefited us in Q1 include:

1). Lower expense. Some May associates chose to leave the company before their out date and we have not ramped up our new organizations as fast as expected. This was obviously great news for our expense in the quarter and fortunately, we do not believe it has hurt our business.

2). Credit. Our credit performance in Q1 was better than expected due to greater profitability on the May portfolio as well as lower operating expense.

3). Our sales in malls with duplicate stores did better than expected when competing with a store in the same mall that was in clearance mode. Most of these stores, however, are now closed, so that benefit is behind us.

Those three factors together explain most of the positive variance to our expectations. However, the good sales trends in the Macy's doors also helped in the quarter and as I said earlier, this does bode well for the future. I will now go through the key components of our Q1 performance. First, sales. Sales in the quarter were $5,930 million, which was at the upper end of our guidance for sales of $5.75-6 billion. On a comp store basis, which as you know is the Federated doors only, we were flat with last year and better than our expected minus 1.5-0.5%. What this means is that our Federated stores did better than expected while the May doors operated towards the lower end of expectations, which put the total at the high end. Frankly it's not surprising that the May doors are struggling a bit now, given the changes these stores are undergoing and the disruption in the May organization last fall when the Q1 assortments were bought.

Our strongest sales in the quarter regionally were produced at Macy's Florida, while Macy's north and Macy's mid-west had the weakest sales performance. Remember, though, that these two divisions are both entirely May company doors. So it should not be surprising that they had the weaker performances in the quarter. By family of business, looking at the Macy's and Bloomingdale's trends only, we saw strength in dresses, juniors, young men's, cosmetics and fragrances, as well as men's. The home businesses continued weak in the quarter, but some parts of soft home including house wares, textiles and luggage, did show improved performance in the back half of the quarter. The furniture business, however, did continue weak throughout the quarter.

We feel comfortable with the underlying sales trend. Average unit retail was up about 6% in the Federated doors and we have seen improved sell-throughs at regular prices. The trends that we're seeing are more casual and warm-weather based, supporting a good Q2 if the weather cooperates.

Gross margin rate before inventory valuation adjustment in the quarter was 38.8%, down from 40.2% last year. This reduction was as expected and was driven by markdowns in the former May location needed to improve aging and transition to the Macy's assortments. The legacy Federated stores produced a gross margin rate just slightly above last year in the quarter, indicating the solidness of the performance in those stores. SG&A in the quarter before integration expenses was $2,154 million or 36.3% of sales, up 300 bps from last year. While this rate is higher than last year, it is lower than what we had expected. As I mentioned earlier, the lower than expected expense is in part due to a slower ramp up of new associates, quicker departure of May associates and better than expected credit results. Remember, as you're looking at expense versus last year, our expense is higher than it otherwise would have been due to the sale of the Federated credit portfolio to Citigroup last fall.

Also, we've had some overlapping expense, or what we call the sub-period expense, amid May divisions that have been consolidated into a Macy's division. This is needed in some cases until the systems have been converted and in other cases until the names are changed. We also expensed options for the first time in Q1, while non-cash lists did add $12.5 million to our expense in Q1 this year. Depreciation and amortization was $316 million in Q1, up from $177 million a year ago. Operating income excluding May-related transition items was $149 million. The May-related integration costs were $123 million plus the inventory evaluation adjustments of $6 million for a total of $129 million. Some of the key items included in that $129 million were store-closing-related costs, severance, retention and other HR-related costs and then costs associated with a systems conversion.

We are still on track to use about $1 billion of cash in 2006 for these May-related integration items. Interest expense was $138 million in the quarter. Tax expense was a benefit of $44 million or 37.3% of pre-tax income. The effective tax rate for 2006 has in fact been reduced to 37.5%. It was slightly different in Q1 due primarily to rounding, and average share count on a diluted basis in Q1 was 279 million shares. So the EPS from continuing operations was a loss of $0.27 in the quarter, or an income of $0.02 excluding the May-related integration costs. Discontinued operations produced income of $22 million or $0.08 per share in Q1. Cash flow in Q1 also exceeded our expectations. I recognize that, given the May acquisition, it is hard to compare cash flows this year to last year. One thing I should point out, however, is that as we look at operating income excluding integration costs, and adding back in the non-cash items, depreciation, amortization and stock-based compensation costs, this produced positive cash of $491 million this year, versus $432 million a year ago.

So that's a summary of the quarter's financial results. In addition, I should mention that we have accomplished the following, also in the quarter, all of which are very important to making this integration work. First, we continued what we're calling 'Onboarding' initiatives for new May associates, trying to make them feel comfortable in their new work environments. We are so excited about the May talent that we have been able to add to our team, and it's this combined team that will make our vision materialize. We also converted our first credit and division systems in the first quarter. We converted the credit systems for approximately 40% of the May portfolio, which is now allowing us to sell this part of the portfolio to Citigroup earlier than expected, subject to regulatory approval. And we cleared inventory from 68 locations, with seven more still in clearance mode and three to begin July 2nd. We are very pleased that our integration is on track.

In terms of an update on our planned asset dispositions, here too we are on track. The books are now out for both the Bridal Group and Lord & Taylor. We have had lots of interest expressed in both and we still expect to complete the Bridal transaction in Q2 or Q3 and Lord & Taylor by year-end. As for the credit portfolios, we sold the portfolio that was previously owned by GECC to Citigroup on the first day of Q1. And we are planning to sell to roughly 40% of the May portfolio that I just mentioned, having been converted to our systems, to Citigroup hopefully over the next month or so subject to regulatory approval. This will accelerate the $785 million to $800 million in expected pre-tax cash proceeds on this part of the portfolio from what we had been planning earlier. The remaining part of this transaction is expected to still close in late July or August. We are also making progress on the overlapping real estate. We have deals announced for 46 of the 80 stores that we are disposing plus two Lord & Taylor locations.

We are close to deals on another 18 locations. We are still expecting that most of these transactions will close in late Q2 or Q3, with total after-tax proceeds of $400-500 million still expected. As we look to Q2, our expectations for sales and earnings have not changed. We are expecting total sales of $6-6.25 billion, comp store growth of 3-5% and EPS excluding integration costs of $0.45-0.55. The margin rate in Q2 excluding the valuation adjustment is expected to be down versus last year, but not by nearly as much as we saw in the first quarter. In Q2, however, the inventory valuation adjustment is expected to be much higher as anticipated, as we take markdowns on not-going-forward merchandise and the price equalization markdowns as we consolidate systems. SG&A as a percent of sales excluding May transition costs is expected to increase again in Q2 but here too, not by the same magnitude as in Q1. This is largely because the subdivision expense is declining as we go through the year.

By Q3, we expect to start to see the SG&A rate reductions versus last year, in spite of the sale of our credit business and the addition of expensing a stock option. Let me reiterate the fact that we are on track to deliver the $175 million of synergy savings this year and at least $450 million next year and each year thereafter. The outlook for the back half of the year is also unchanged, with sales expected to be $15-15.5 billion, comp store sales expected to be up 2-4% and EPS from continuing operations excluding May-related transition costs and inventory valuation adjustments of $3-3.25. For the year as a whole, our sales guidance is unchanged at $27.25-27.75 billion, and our EPS guidance from continuing operations, excluding May-related transition costs and inventory valuation adjustments is now ($3.50-$3.75?), updated for Q1 actual results.

So that's our update. I would say the message is so far so good, with a lot more work still to be done. However, given the strong performance of the Macy's doors, the success of the initial systems conversion and the outstanding effort being put forth by everyone in the combined companies we are cautiously optimistic. We look forward to keeping you updated on our progress each quarter as we go through this transition year. Thanks for your interest and now I'll open the call up for your questions.

Questions and Answers

Operator

Operator instructions. I have your first question, coming from Deborah Weinstein of Citigroup. Go ahead, please.

Q - Deborah Weinstein, Citigroup

Thank you, and Karen, thanks for the great update. It's extremely helpful. In terms of the Federated buyers having an impact on the May assortments, I believe you previously stated that, in July and August, we'll start to see the private brands from Federated rolling in to May. How should we think about between now and that time, other changes that we might see on the Federated organization or the May organization from a merchandizing perspective.

A - Karen Hoguet

There really is not going to be an impact to the private brand assortments coming in, and frankly the major impact will not be felt until Q3, which is what we have said. So the Q2 will continue to be somewhat floppy as we're transitioning the assortments and as the assortments from Q2 were bought by May buyers as they were transitioning last fall so as in Q1 we do expect some disruption in receipt flow. As well as continuing markdowns needing to be taken.

Q - Deborah Weinstein, Citigroup

OK, so just from a theoretical perspective, should be expect on the growth side what we saw in the May division in Q1, expect to see that in Q2 as well?

A - Karen Hoguet

What I said was that in Q2 we could expect the gross margin, excluding the inventory valuation adjustments, to be below last year but not by the same magnitude as in Q1.

Q - Deborah Weinstein, Citigroup

Last question, on the systems integration side, you said that you're obviously now planning to have 40% of the credit card piece sold earlier than expected. Can you just walk us through that process and the thinking there?

A - Karen Hoguet

Well, I mean obviously we're trying to accelerate cash from the assets that we're disposing as quickly as we can. We converted the credit systems, which was frankly on our systems timeframe, in April, which has enabled us to work with Citigroup as well as the regulators to try to accelerate the sale of that part of the portfolio. Previously, we had thought we would sell it all together later into Q2. What it really will do is enable us to liquefy that sooner.

Q - Deborah Weinstein, Citigroup

OK, great. Thanks again for the update.

A - Karen Hoguet

You're welcome. Thanks

Operator

Your next question comes from Dana Cohen of Bank of America. Go ahead please.

Q - Dana Cohen, Bank of America

Good morning, Karen. Can you just give us some sense of buckets of SG&A that will start to happen in Q2, sort of just give us a timeline of what you think the SG&A reductions would be in Q2 and then through the year, just so we have a sense of timing? Then also, can you update us on the strategy for exclusive products?

A - Karen Hoguet

Yes. That's two different questions. In terms of SG&A, I'm not sure how I can be helpful in Q2. We have already in essence achieved the expense reductions and the division consolidation, the corporate office consolidation, some of the big bucket that we are expecting. But we have to keep people around until the systems are converted and the names are changed. We are at the ongoing level plus the duplicate expense which will come off as we go through Q2.

Q - Dana Cohen, Bank of America

So maybe middle of Q2 is when you start to see it, accelerating into Q3?

A - Karen Hoguet

I don't know, but I know we'll see it in Q3. Most of the systems, Dana, don't get converted until July. In essence it's really end of Q2. As I'm sitting here thinking about it. So I suspect it really will be ramping up as we hit Q3 as opposed to midway through the second. Your second question, in terms of the exclusive merchandise, obviously since we've have a call with investors, the Martha Stewart announcement happened, which is an extremely exciting development for the company. It will be in all stores, really appealing to that core customer of ours which will allow the Home Store to really distinguish itself, which as you know has been an important part of that home strategy. Our hope is that we will have other deals like this as we go forward. As you know, differentiating our assortments has been a major component of our success pre-May, and now with May, we think we have many more opportunities to do deals like this. Now I will tell you, the Martha deal is bigger and broader in terms of its reach than most we will be announcing, but we are continuing to focus on this because again, if our assortments are not different and wanted and special, we're going to have a hard time achieving the vision here.

Q - Dana Cohen, Bank of America

Great. Thanks so much.

Operator

Your next question comes from Stacy Turnof of Merrill Lynch. Go ahead, please.

Q - Stacy Turnof, Merrill Lynch

Good morning, Karen. Could you update us in terms of the time of Macy's re-branding? Should it be ready for back to school or the Labor Day weekend? And a follow up to that, which is looking to your advertising strategy as it's relating to that. Any update in terms of reducing May's budget going forward?

A - Karen Hoguet

The name re-branding will happen September 10-11, that time frame. And there will be lots of marketing and special events and excitement around that. Obviously no details will be provided because we want the surprise factor to help us through that period. But it will be a very exciting couple of weeks in terms of marketing for the Macy's brand. In terms of marketing savings going forward, I think as you all know, in the markets where we overlap, there will be savings and that's been part of the synergy number that we've talked to you about. Beyond that, it is far too early to really know longer-term where our marketing expense will settle. That's obviously something that we are looking at as we try to maximize the Macy's brand.

Q - Stacy Turnof, Merrill Lynch

But there is an opportunity to possibly take that number down?

A - Karen Hoguet

Absolutely. I mean, remember our focus here is driving comp store sales growth. So that's our number one goal. As you all know, we brought in a woman named Anne McDonald who is our new Chief Marketing Officer and she's been with us now about a month. Obviously, re-looking and examining our strategy as a national Macy's is high on her priority lists. Whether that leads to lower costs or not, I don't know. But I'm pretty optimistic it's going to do great things in terms of driving the business.

Q - Stacy Turnof, Merrill Lynch

Great. Thank you.

Operator

Your next question comes from Jeff Stein of Key Bank Capital. Go ahead, please.

Q - Jeff Stein, Key Bank Capital

Karen, as it relates to your private label program, I'm wondering if you could talk about how quickly you're going to try to convert the former May customer to become a Federated customer. In other words, if you were to take a current Macy's store and a converted store that were pretty much the same demographically, will they have the same percentage of private label and exclusive merchandise in the stores this fall? Or are you going to try to perhaps ramp up a little bit slower in the new stores?

A - Karen Hoguet

I think probably not this fall, but very soon. And it's just a question of how we could buy last October for these new doors. So I suspect we will probably be a little conservative in our buying for this first go-round, but by next spring I would think it would be pretty close in like doors.

Q - Jeff Stein, Key Bank Capital

Great. And secondly, your interest expense looks like it was well below expectations in Q1. Any thoughts about resetting your expectations on interest expense for the year? I think you were originally in the $550-600 million range.

A - Karen Hoguet

I don't think it was far off what we had expected, so I'm not really sure how to answer that, Jeff. I don't see a reason to change it.

Q - Jeff Stein, Key Bank Capital

Finally, with regard to - you mentioned at the outset, you still have quite a bit of integration work ahead of you. Other than the systems integrations, can you perhaps share with us some of the major hurdles that you have to overcome on the integration this year?

A - Karen Hoguet

That's a pretty big one. Also, we're converting all of the stores and 'Macy-izing ' them, you know, getting the signs changed etc. and that's a pretty comprehensive program. Then it gets down a lot to the training in terms of sales associates, making sure the May associates understand not only the Federated systems and how to complete POS transactions, but more importantly, how to be good ambassadors for the brand. That's one of the major areas of focus. Then you get to the assortment. You know, just trying to continue to refine our buy location assortment strategy which will be ongoing as we proceed forward.

Q - Jeff Stein, Key Bank Capital

Got it. Thank you.

Operator

I have your next question coming from Christine Augustine of Bear Stearns. Go ahead, please.

Q - Christine Augustine, Bear Stearns

Thank you. Hi, Karen. Could you give us the comp inventory and could you just remind me, is $1.6 billion still your capex plan for 2006 and can you give a breakdown just roughly of where that spend is going to go?

A - Karen Hoguet

The capex budget is $1.6 billion and you know, as we've said, the conversion piece of that that will go away in the future is about $400 million. Beyond that, I don't really have a breakdown in front of me, Christine.

Q - Christine Augustine, Bear Stearns

So is the $400 million, it's got to be more than just a signage change though, hasn't it? Are you doing some actual renovations to some of the May stores?

A - Karen Hoguet

Remember, there were five tiers to what we were calling conversion. Ranging from just changing signs to doing a more complete remodel. And you know, steps in the middle. We've got different levels, again we are completely remodeling some of the stores, we're putting new reinvent initiatives in some of the stores, and in most of the stores - in fact all of the stores - we'll have some level of private label signing and fixturing. But it's a lot of doors!

Q - Christine Augustine, Bear Stearns

OK. How about the comp inventory number?

A - Karen Hoguet

The Federated comp inventory was down versus a year ago. May inventory was way down, but a lot of that reflected the fact that we took inventory out of the stores that were closing. Beyond that it was down as well.

Q - Christine Augustine, Bear Stearns

Just to clarify, in Q1, roughly 950 stores were open and you reported sales from all of those stores including the ones that are now closed. Is that correct?

A - Karen Hoguet

When they go into GOB(?) mode or - I'm sorry, clearance mode - they're not reported in sales.

Q - Christine Augustine, Bear Stearns

They're not?

A - Karen Hoguet

They are in continuing operations, as a net number, but not in sales. So as opposed to Lord & Taylor and Bridal Group, who are in discontinued operations, the clearance store operations are in the continuing operations number.

Q - Christine Augustine, Bear Stearns

But not in the top line?

A - Karen Hoguet

Correct.

Q - Christine Augustine, Bear Stearns

Great. Thank you.

Operator

Our next question comes from Marian Clemens of Goldman Sachs. Go ahead please.

Q - Adrian Shapiro, Goldman Sachs

Hi, Karen, it's Adrian Shapiro. Good morning. You highlighted that you're expecting to see accelerated cash proceeds due to the credit sale and yet we heard no change to guidance in the second half. Shouldn't this perhaps provide some upside potential as we'll be able to be buying back stocks sooner than everyone expected?

A - Karen Hoguet

That just depends on the timing of all the assets sales. I mean, is May accelerated, is just depends on when for example the real estate deals get closed. So it may or may not accelerate it alone.

Q - Adrian Shapiro, Goldman Sachs

OK. In the current guidance, what is currently factored in for buyback?

A - Karen Hoguet

We're not discussing the timing of the buyback. You know, what we've said is that we expect to start it last in the second or third quarter. But we have not been more specific than that.

Q - Adrian Shapiro, Goldman Sachs

Then my question (related to you highlighting you are pleased?) with what's going on at Macy's, you know, encouraging positive underlying trends. We obviously (held applied comp?) and you mentioned averaging at retail up 6%, so should we think that traffic was down by that much? How should we think about that? And how does that compare to prior quarters?

A - Karen Hoguet

It's really what we have been experiencing for a while, so that's not a new trend. And we're pleased with the tone of business in the Macy's and Bloomingdale stores.

Q - Adrian Shapiro, Goldman Sachs

OK. And would you think part of that may be traffic shortfall related to clearance activity away from Macy's?

A - Karen Hoguet

I don't think so. Because that really hasn't changed.

Q - Adrian Shapiro, Goldman Sachs

All right. Thanks, Karen.

Operator

The next question comes from Bernard Sosnick of Oppenheimer. Go ahead please.

Q - Bernard Sosnick, Oppenheimer

Karen, the Q1 interest expense if annualized would be about $550 million. Could you review your total expectation for interest and why wouldn't it be coming down if you're going to be getting certain funds earlier than expected?

A - Karen Hoguet

Well, I mean, there's a lot of things that go into interest expense. And at this point, we think the annual $550-600 is still right. We did expect - and we said this on our call in January - that the interest expense would be higher in the first half of the year. But again, a lot depends on the timing of these asset sales as well as starting the buyback.

Q - Bernard Sosnick, Oppenheimer

OK. Thank you.

Operator

Your next question comes from Bob Debral of Lehman Brothers. Go ahead, please.

Q - Bob Debral, Lehman Brothers

Hi Karen, good morning. Just a question on the inventory receipt plan, when would you expect to allow the inventory in that you'll be flowing into the May doors? Is it on the books already or in the timing of it from the various vendors?

A - Karen Hoguet

I'm not sure I understand. There's obviously inventory ongoing into the May doors.

Q - Bob Debral, Lehman Brothers

But in terms of, as you re-merchandise and re-assort all those stores, on the inventory number that you had today, how much of it included inventories that you've already received from the vendors that are going to go into, sort of, July and August? Into the May doors?

A - Karen Hoguet

It'll be in the numbers when we receive the merchandise.

Q - Bob Debral, Lehman Brothers

Do you have any idea how much you have already in terms of just the smoothness of the flow of merchandise?

A - Karen Hoguet

We don't have any now and we're expecting to start pulling in, in July.

Q - Bob Debral, Lehman Brothers

OK. On the reinvent stores, has there been the comp on the reinvent stores and the Macy's doors, how many doors do you have now on the core Federated doors that are in the reinvent that have been reinvented already? And how has that comp done?

A - Karen Hoguet

The comp has been somewhat better. I mean, not hundreds of basis points better, but somewhat better. In this case, we're doing so many other things at the same time it's going to be hard to tell. You know, because the assortments are changing so dramatically, simultaneously. So we do expect them obviously to get a pop through both the reinvent as well as the change in assort.

Q - Bob Debral, Lehman Brothers

Just one final question, on the exclusive merchandise, when you go in to re-launch the Macy's nationally in September, about how much of the product do you expect to be exclusive to Macy's versus all the other retailers in the department stores?

A - Karen Hoguet

The way we look at it, there's exclusive, which can either be private brand or exclusive from the market, and private brand last year for Federated was about 18%, lower for May and even lower for the old Marshall Field stores. So as we go into September, we won't hit the 18% for the total company or the equivalent for the fall season. But we hope we'll be closer. Obviously that's exclusive. We also look at what we call limited distribution products, which will probably be a little bit more than a third of our assortment at that point. And while not exclusive is not in many doors.

Q - Bob Debral, Lehman Brothers

OK. Thank you.

Operator

Your next question comes from (David Glick?) of Buckingham. Go ahead please.

Q - (David Glick?), Buckingham

Good morning, Karen. I was wondering if you could tell us what the transfer rate is from the recently closed doors in malls with duplicate locations and which categories of merchandise are transferring at higher rates and maybe such as cosmetics that have more limited distribution? And how much of your comp guidance for Q2 includes the benefit of a higher transfer rate?

A - Karen Hoguet

You know something, the transfer rates are all over the board and vary by mall and there's really not a good rule of thumb we can give you. Obviously the areas of benefit are areas like cosmetics, women's shoes, areas where we will be more unique and different in the assortments. And that is in the guidance for Q2, but not to a huge degree.

Q - (David Glick?), Buckingham

OK. Also, one final question. Your guidance for the year is up by $0.05, not the full extent of the Q1 upside. Is that due to the changing average share count throughout the year?

A - Karen Hoguet

Correct.

Q - (David Glick?), Buckingham

OK. Thanks a lot.

A - Karen Hoguet

Thank you.

Operator

Your next question comes from Michelle Tan of UBS. Go ahead, please.

Q - Michelle Tan, UBS

Thanks. Hi, Karen. I was just wondering if we could get any more color - I know you guys don't like to talk that much about the sales change on the May side of the business - but you did mention it was towards the lower end of the plan. Can we get a little bit more color around that and in how we should look at when that disruption from the integration starts to wash out? Is it in Q3 where you were really fully buying the assortment?

A - Karen Hoguet

We hope it's Q3 and we don't think it'll be before that. You know, Q2 could be sloppy, as we've said. Now we've factored that in as we've talked about guidance. And you know, hopefully Q3 will get better, but think about this in a gradual way. I mean, it's not like suddenly Q3 is going to take a huge step forward. You know, this'll take time to get the assortments right.

Q - Michelle Tan, UBS

Right. How about on Q2, you saw the May sales come in towards the lower end of the range for Q1. I mean, does that give you any kind of thoughts as we move into Q2 as to where you would expect them to come out relative to your range?

A - Karen Hoguet

Well, we've had lots of discussion about where we think they may come out and there's all kinds of arguments in different ways. We ended up very comfortable with the range that we're in, that we said earlier.

Q - Michelle Tan, UBS

OK. Great. Thank you.

Operator

Once more, if you would like to ask a question, please press *1 on your touch tone phone. Again, if you would like to ask a question, please press *1. OK, Ms. Hoguet, at this time I'm sure there are no additional questions, ma'am.

A - Karen Hoguet

Thank you.

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