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Macy's Inc. (NYSE:M)

UBS Global Consumer Conference

March 14, 2013 8:50 am ET

Executives

Karen M. Hoguet - Chief Financial Officer

Analysts

Michael Binetti - UBS Investment Bank, Research Division

Michael Binetti - UBS Investment Bank, Research Division

So good morning. We're going to get started with Macy's here in just a moment. If you guys would -- and so, good morning, I'm Michael Binetti, UBS soft lines analyst. It's my pleasure to introduce today Karen Hoguet. We will be -- just before we start, we'll have people going through the audience to collect your questions. If you haven't, there should be index cards available and they'll bring the questions up to me. So please, help us ask some good questions. And Karen, today -- Karen is a true veteran in the department store world, and this may sound like I'm kidding, but she joined the company...

Karen M. Hoguet

I feel old. You think I'm a veteran.

Michael Binetti - UBS Investment Bank, Research Division

As a senior consultant from Boston Consulting Group in marketing and long-range planning in 1982. What a hire for a long-range planning group, huh? And since, she's held a number of titles in the finance organization of the company. She was SVP of Finance, 1997; Executive VP of Finance in 2005.

Karen M. Hoguet

I don't know. It's all good [ph].

Michael Binetti - UBS Investment Bank, Research Division

And the elected Chief Financial Officer of Macy's, February 2009. Been with the company through industry changes, industry changing mergers like Federated in May in 2005, through disposals of major vendors like Lord & Taylor, she's been there, through the worst of times, including bankruptcies. Today, against the odds, Macy's has come out of the great recession in 2008 and '09 among the strongest and most consistent-performing companies in the soft lines retail. Under Karen's watch, they've delivered 3 years of 3%-plus comps. Just guided through another year of 3%-plus comps, striking record for a large chain in the U.S. -- mature U.S. retail category. So it's an honor to have her here to spend time with us and answer all your questions. Again, we do have people walking around with note cards, so please help us come up with some good questions for Karen today.

Question-and-Answer Session

Michael Binetti - UBS Investment Bank, Research Division

But I'll kick it off, if it's okay, with the guidance I just talked about. So as you set your guidance for the year, what were some of the macro puts and takes that you thought about? I guess, we're just opening most of the questions with macro questions.

Karen M. Hoguet

Sure.

Michael Binetti - UBS Investment Bank, Research Division

What are some of the macro puts and takes you thought about? Obviously, some people are going to look at guidance for 3.5% comp sales growth and say, "Oh, Macy's has never done that 4 years in row, et cetera."

Karen M. Hoguet

It's what they said last year.

Michael Binetti - UBS Investment Bank, Research Division

Yes, they said it last year and they're going to keep it saying though. Talk to us about the macro environment that you're in.

Karen M. Hoguet

Yes. The truth is, to that question, the world has really changed as a result of the Internet. And so for those of you who followed at least Macy's, 5, 6 years ago, people thought about comps in the 1% to 2% range. Now, with the Internet and omnichannel, which is really a way of getting total sales growth, frankly without the investment of new stores, the dynamic has changed. And really, the comp, instead of 1% to 2% should be thought of in 3% to 4%. So we are quite confident that we will be able to continue a fourth year of comp store sales growth in that range. From a macro perspective, we think the customer is okay, not particularly strong, not particularly weak. And we look at the momentum we have coming into the year and we feel quite confident. It doesn't mean that we're not cognizant of all that's going on in Washington and what's going on with the payroll tax and every other factor, but we feel as if the environment will be supportive of us achieving the guidance that we've laid out.

Michael Binetti - UBS Investment Bank, Research Division

So, I guess, in our estimates, the brick-and-mortar stores for you last year grew about 1%, e-commerce 40% plus. I appreciate the difference between Internet and retail becoming increasingly blurry and you guys certainly do the job of talking about that, but how do you think about -- obviously, most people think about this industry as a very low-growth industry over time that ends up being -- the winners end up being true share gains stories, and you guys are obviously executing very well within that environment, but how do you think about the longer-term measure of brick and mortar?

Karen M. Hoguet

I think the measure of brick and mortar, the whole concept needs to go out the window. It's just so different today. How do you account for somebody who's buying off a mobile device in a store? How do you account for somebody who shopped all day, didn't want to carry shopping bags on the train, went home and bought it all on macys.com? I really think it's sort of an old way of thinking about the business. The way we're looking at it is sort of the total, and how do we transform our stores to be relevant in a world with all of this technology available to her? And it's really quite exciting. And so, when we think about our stores, one of the things that 290-plus stores have already become, becoming 500 this year and probably more so next year, are fulfillment doors. So we're also enabling to ship to the customer that will enable us to get to buy online, pickup in store, and even next-day or same-day delivery, great use of our stores. The other thing is we can use our stores, in some cases, to show merchandise that we don't have fully inventoried in the store, but we can pull out of our warehouses. These are categories that were not profitable to have in all 800 doors because they were so slow turning. So again, using our square footage very differently but to be very relevant to the customers. So I don't share the concern. But again, I'm not as fixated on Internet versus bricks and mortar. And in fact, this year, we're not reporting it separately anymore because, frankly, I was concerned about the accuracy of what we were reporting. I've looked at it in total and how is Macy's, in total, doing. And I think that's really the right way of doing this.

Michael Binetti - UBS Investment Bank, Research Division

There's some other categories of retail though, like if you look at consumer electronics where they'll say the same thing, and we all see that becoming like a showroom for things. But they're starting to show signs of deleveraging, heavy on old, having perhaps over stored, so I guess you just look at it differently where you...

Karen M. Hoguet

Well, remember we're in the fashion business, and fashion is different. Our customers are probably -- and again, I can't speak to the electronics, but my guess is much more female based. And all of the research shows that lots of customers like to shop, it's social, it's fun and it's sometimes hard to do online. So we'll often find somebody buying something online, returning it in the store, trying on different things. It all sort of works together, but we find that with fashion, people really do like coming into the store. And by the way, not everybody, that's why there's chocolate and vanilla ice cream, you've got to do both. But I think our stores are very different than the electronics guys when you're thinking about the relevance of the physical stores.

Michael Binetti - UBS Investment Bank, Research Division

Then there's a chance that we don't -- perhaps, a small chance in 10 years, we won't all just be sitting around in underwear, ordering everything we ever buy on our iPads in our living room, we're actually going to go to stores.

Karen M. Hoguet

I don't see it happening. I don't even see it close to happening.

Michael Binetti - UBS Investment Bank, Research Division

There's a human component to it. I mean...

Karen M. Hoguet

Absolutely. And people like the help of sales associates. We've invested a lot. As you know, our 3 key strategies being My Macy's and the localization, the omnichannel and MAGIC Selling. We've spent a lot of money on MAGIC Selling to make our sales associates better engaging with our customers, more knowledgeable about the product to help sell. Big deal, you can't do everything by yourself on the Internet.

Michael Binetti - UBS Investment Bank, Research Division

Well, let's talk about that for a minute. The MAGIC Selling is -- when we launched the company a year ago, we found a lot of interesting industry data on how good the mood from your employees had gotten. As you started moving into MAGIC Selling and retraining your employees, they started telling those who were surveying them, "We really like working here more. We're feeling more fulfilled in our job." What has gone on to the MAGIC Selling training program? What were your big learnings there that -- behind that need?

Karen M. Hoguet

It's a couple of things. One is the fact that we, as a company, are investing in our sales associates would make anybody feel good. And some of us sometimes get bored with training, but for the most part, it makes you feel like the company really cares about you. They're getting coached much more on how they can do better, which is very important. But also the My Macy's component has given a lot more decision-making authority in the store. So when a sales associate has been complaining forever that my customers need more long-length pants in the summer, and it sort of goes into the ether, nobody ever does anything about it, that must have driven them crazy all these years. Now, that with My Macy's and the structure we have in place, they ask for it, chances are they're going to get it. And everybody likes to have their ideas listened to, and oh, by the way, if their idea gets listened to, we're likely to sell it. Even if it was a mistake, they're going to make it work, because they know they can ask again. So I think it's a combination of the My Macy's and the MAGIC Selling that has really helped morale out in the field, and I think that will continue.

Michael Binetti - UBS Investment Bank, Research Division

So we have some questions coming in from the audience. And I apologize, I going to probably jump around and I'll try and keep this organized on topics, but I'll probably jump around a little bit. Could you walk through the timing of the Herald Square renovation a little bit, the $400 million, I think, spent, when? And when is the maximum disruption?

Karen M. Hoguet

Probably, I would say the maximum disruption was last year for 2 reasons: one, it's was first floor; and secondly, it was the first year that we did it. So as of this week, we're now year rounding on last year's disruption. So it's still a lot of disruptions, but compared to last year, it compares favorably. So, sort of that's the answer on that piece of it. And also, we've got some of the space now completed, so you get good news beginning to roll in as we go through this year. At this point, the shoe floor is complete. What we call the Luxe shops, which are on the broadway side of Herald Square, if you're familiar with the building, with Louis Vuitton, Gucci, Longchamp, Burberry, that's all complete. And if you're down in New York, I really urge everybody to come see it, because it's -- if you're a student of retail, it's really very cool how the store is being transformed. The shoe floor is done, fine jewelry is done. The rest of the first floor is very disrupted right now. Our cosmetics has been shrunk into a smaller space, and the other pieces of accessories -- oh, sorry, the Michael Kors and Coach handbag shops are done too. So the front part of the first floor are done, but the rest of cosmetics and the main floor are pretty disrupted. And men's on the 7th Avenue side is very disrupted. Also this week, we opened a new restaurant on the sixth floor, called Stella, which we were at recently at a sort of a testing that was really fabulous, and we hope that, that takes off. We opened all the windows on the Broadway side. You can see the Empire State Building. We're hoping it becomes a very cool, hip place. For any of you who've been to the restaurant, Lincoln, at Lincoln Center in New York, same group, and the menu is really very good and they have terrific gelato, by the way, if you ever need a snack. But -- so that part of the store, we are doing very well. Everything we've reopened is actually exceeding our expectations and we feel great about that. So now, we're working on the cosmetics floor, the men's side, and men's will be done over the next 2 years, the rest of the women's accessory part will be done this year, then we start moving up the floors and also down in the cellar, which is going to become a millennial shopping environment. So again, we've got 4 years mapped out. It's a lot of work still to be down, but we're very encouraged based on the spaces that have completed, what it's doing for the store.

Michael Binetti - UBS Investment Bank, Research Division

And the millennial site -- store opens when?

Karen M. Hoguet

I was afraid you're going to ask me that. I think it's '15. Don't quote me. I think it's not this year and I don't -- and it's not next year, it's '15.

Michael Binetti - UBS Investment Bank, Research Division

Another one from the audience here. Can you talk a bit about what you see in mall trends? Will -- and then, will you look to grow stores in smaller square footage? And what is your mobile strategy? I'll ask him again if...

Karen M. Hoguet

Yes, and they forget as go. Interestingly, the smaller square footage is very interesting. Because our vision as this omnichannel strategy keeps evolving, is that we may need less inventory in our stores going forward. At least that's one person's theory. We're not there yet, our systems aren't compatible enough today to know how much's left. But our theory is that we could, in some places, build smaller doors, given what's happening with omnichannel. It's not significantly smaller, but smaller, so that should be helpful to us as we go forward. Mall traffic, obviously, depends on the mall. No surprise. But by and large, that has not been an impediment to our achieving the sales growth that we achieved last year or that we expect to achieve this year. Mobile is -- I'm sorry, did I answer? Okay. Mobile -- I had remembered them all. Mobile -- it's probably because it's the first thing in the morning, but mobile is really exciting. And we think about mobile in multiple ways. One is to convey marketing messages, couponing, all kinds of personalized offers when you're in the store, beginning to test lots of things with that. We're also finding more and more traffic coming to macys.com and bloomingdales.com via mobile devices. Now mobile devices includes tablets and smartphones, I view them very differently. So we're also now trying to split mobile into 2 pieces, because I don't really think a tablet is the same thing as a smartphone in terms of how people use them. But we are finding a lot of traffic coming into the site to buy off of tablet, interestingly, typically, while they're watching TV, because we can see orders go up as the ads happen on the television, it's actually quite cool. The smartphones in-store, we do have people transacting. That's a tougher transaction, but we're continuing to build our app for the mobile device to allow us to do more commerce more easily in-store. This whole subject around mobile payments is coming down the pike. We've tested lots of things. We'll continue to test staff check out is something we're going to start testing all kind of things that this mobile device will eventually become, but not right away.

Michael Binetti - UBS Investment Bank, Research Division

Great. I'm sure you get this question frequently these days. How much of 2012 same-store sales came from competition? And does the 3% to 4% sales gain this year assume similar gains in 2013, if so?

Karen M. Hoguet

Yes. I think though that people way overestimate the benefit that we're getting from some of the weak competitors. So sure, that obviously helped us in '12. I think it'll probably still help us in '13. But I don't think it's such a big number that anybody should panic that, that's going to preclude us from achieving what we're planning to achieve this year.

Michael Binetti - UBS Investment Bank, Research Division

Fair enough. How do we think about incremental margins given that -- let's skip that one, I'll read that one, and I'll ask you another one. With online sales increasing...

Karen M. Hoguet

Wait a minute, what happened to that one?

Michael Binetti - UBS Investment Bank, Research Division

Well, I can't read this part. I'm going to read it while you answer the next one. Okay, how do we think about incremental margins given that online growth is faster in 2013 and free shipping is increasing?

Karen M. Hoguet

But I don't want to embarrass the person that asked the question, but I don't know by margins if you mean gross margin or EBIT. We tend to think about that EBIT side, so I'll answer that, I'll try to get to the growth also. We expect our profit rate to continue to improve. I think, as everybody knows, our objective has been to get to the 14% to 15% EBITDA as a percent of sales and we're going closer each year. I've said that I don't think '15 is going to be as easy to achieve as when we set it originally, just given our attitude towards growth. But I just happened to complete looking at our competitors for 2012. I don't see anybody really that -- any need to get to 15%. So I'd think about our getting to the 14%, and this year, we should continue to make progress towards achieving that, even with the free delivery question. That leads me to think somebody is thinking gross margin. And because our gross margin used to be really -- it's merchandise margin that really drove that number. Now, with free shipping, we've got sort of 2 factors impacting that in a major way. I do expect our merchandise margins to be flat to up slightly and whatever, year '13, but the free shipping could continue to be a drag. But honestly, you shouldn't focus on that, you should be focused on the EBIT line because we will continue to improve that.

Michael Binetti - UBS Investment Bank, Research Division

The next question I was getting to, with the online sales increasing so fast, how do you balance shipping costs and maintain margins, less discounting? And do you think the trend will be free shipping for everything in the future?

Karen M. Hoguet

Well, I think it's free shipping for most things, today. I think the question will be, how will the demands for how quick you ship lead to more cost relative to free shipping? But I think that's sort of the competitive environment we're in. We don't think so that, that's an impediment to our continuing to improve our operating income as a percent of sales. So yes, I do think free shipping is just about there for everything today, so I don't see it as a -- we don't generate a lot of revenue anymore from shipping. So I don't see that as a big issue for us as we go forward, and I do think that we will continue to improve the operating income. The -- one of the benefits here is, as we get the systems online, being able to optimize our inventory more is going to enable us, I think, to improve the merchandise margin. If you think about today, when you place an order online, we're trying to pull it from the places least likely to sell that item regular price. That should help our margins over time. And so that's one of the benefits of omnichannel and helping us to get to a higher growth margin, merchandise margin, as we go forward.

Michael Binetti - UBS Investment Bank, Research Division

I think -- and I guess, this'll tie in to the next question, which is about average ticket in stores versus online. But is that how -- have you guys had some learnings as you've gone through the e-commerce process that have helped drive up the ticket to make that a more profitable sale? Or any contribution there?

Karen M. Hoguet

The Internet sales are profitable. I don't know where these questions are coming from. They're good for the bottom line to do Internet sales, even with the delivery expense. So that mix is not a problem for us.

Michael Binetti - UBS Investment Bank, Research Division

Got it. So the question then -- the question from the crowd is what is average per ticket per shipment for online purchase? And then what is the return percent for online purchases?

Karen M. Hoguet

I don't know the specific numbers. The average ticket online has grown over time, it has not gone down. And the return rate, as you might imagine is, in some categories, the good is quite high online. For any woman in the room, there's a lot of times you buy foreign size dresses, maybe a couple of sizes, maybe a couple of styles and then return back to the store. I mean, that's just sort of part of how that how business is done. By the way, that also happens when people go into the dominant store in the city and do the same thing. We find at Herald Square or 59th Street Bloomingdale's, maybe Natick here, pick your mall. People will go buy a lot, bring them home and then return them. So returns is just going to be a part of the equation for us, and again, particularly in some categories. And what we're trying to do is manage the process to make it easy for customers, manage the economics, so that it's profitable. And also, frankly, which gets to the economics, manages what we do with the return when it comes to a store. Because the last thing you want is a social dress where you'll have one size, one color. That's an automatic sort of 80% off. Unlikely, there's the one individual of that size, is going to walk in the door. And so, we're again, moving inventory around in our -- in the cities, we call it the hub-and-spoke strategy, taking it from the smaller doors, getting that item into a bigger store, where it's likely to be congruent with the inventory in the store. So there's a lot going on to manage the return subject, but it's not going away for obvious reasons.

Michael Binetti - UBS Investment Bank, Research Division

Okay. What has been the biggest surprise to you over the last 5 years for Macy's or for the industry?

Karen M. Hoguet

That's a good question. I don't know that -- I can't answer it, sorry. I just thought of what came to mind, and I'm not going there. But I don't think surprise is the right word, but I have -- when we originally did the work that led us to the localization strategy, I knew it was important. Because I knew that -- and I live in the Cincinnati and I spent a lot of time in New York, I lived here for a while. I know the differences in customer’s market-to-market, so I thought it was important. I also knew that empowering the field would do something, but I think I underestimated the degree to which localization can make a difference and empowerment of the field. And again, I knew it was important when we started down this path with -- just about 5 years ago, but I don't think I realized both how much it could change our sales trend and how many years it would keep happening. Sort of the question I get asked all the time is, isn't it over? And the answer is it'll never be over because customers change. And so getting that field input about what customers in this store really like, one of the big examples in the Boston market, when we first started, was that coats had always been bought out of New York, once we had moved the Boston operation to be managed out of New York, long before the elimination of the division. First year of My Macy's, the coat business in Boston went flying. Why? The My Macy's team here said, you're buying the wrong coats for Boston. Because in New York, everybody walks, everybody's outside. In Boston, it tends to be you're in your car more. And a lot of the big bulky coats were not selling here, because they were uncomfortable while you were driving. So they did a more traditional, a lot more fabric coats rather than the big puffy jackets. The coat business is up to 30% or 40% that first year. And again, you would think New York and Boston wouldn't be that different. That's just a silly example of what's happened. And so I think I underestimated just how much that was going to change our business.

Michael Binetti - UBS Investment Bank, Research Division

And this is a program that's a few years older -- the localization, a middle inning...

Karen M. Hoguet

We tested it in a way, we rolled it out to the company in '09. So it's really fourth quarter of '09 when that started. That's also when we restructured the company and centralized all of the merchandising in New York, which has been also much more successful than I ever thought it could be. I think I underestimated the speed in which you can make decisions when you're centralized compared to the old way of operating. I think I also underestimated how much our vendor relationships would improve when we were one buyer, one vendor. And the speed of decision-making, all of that has been really positive. And also surpassed what I thought 5 years ago. So if you look at when our sales trend really took a change for the best, it's when we restructured the company and started My Macy's. And then omnichannel's just been great on top of that. But that, I always knew would be enormous. So...

Michael Binetti - UBS Investment Bank, Research Division

Right. So obviously the next question is, what's the biggest change you see ahead for the next 5 years for this?

Karen M. Hoguet

I think it's going to be the continual maximization of this omnichannel. I actually think, a year from now, this word, omnichannel, is going to go away, because it's just retail. That's how you do business, but I think there's a lot of benefits ahead of us. It's only been about a year where we've been trying to coordinate and collaborate between our store merchants and our online merchants to really strategize together, work more closely with the vendors to maximize the opportunity. Interestingly, what sells in a store is not necessarily what sells well online and vice versa. So getting these groups to work together, share learnings is critical, but we've got to be really careful that the 90% store guys don't squash the high-growth entrepreneurial macys.com and bloomingdales.com. And it's this collaboration though that I think is going to drive our sales growth way beyond what we've seen already. And also, as we begin to link systems, I think the optimization of inventory should give us big opportunities that we haven't maximized yet. So I think there's a lot left in front of us in this whole omnichannel arena, that I think is just going to be terrific. And the nice part is, Macy's.com started over 15 years ago, so this is not sort of a new love of ours. We've been committed to this for many years, and I think often, investors underestimate how important it is that we've been doing this for as long as we've been doing it. We've got lots of subject matter experts that we've developed over the years. And you just can't suddenly wake up and decide you want to have a website. It just doesn't work that easily, and you just can't throw enough money at it. It's not a money issue, it's a talent issue, and it's this coordination issue that I'm just so grateful that we started as long ago as we did.

Michael Binetti - UBS Investment Bank, Research Division

And what are -- and what do you think are some of the advantages that you have now in house? As we were talking earlier, you mentioned we've had a team that's been there, with some tenure at this point and...

Karen M. Hoguet

Well, it always starts with talent. I mean, everything, probably in any business, but certainly in retail, is the quality of organization. And our macys.com and bloomingdales.com teams are really top-notch, combined with obviously the store talent that we've always had. And the fact that everybody's trying to work together to the common good of the brand, is really compelling and a big deal. Also, I think we've invested in good technology. Sure, we've made a few mistakes along the way as we've tested various things, you'd expect that, and that what's good about testing. But I think our websites have done a spectacular job of keeping up. Lots more to come by the way, I don't mean to imply it all that we're done, but I think we're on the right issues. I think, lots of the next chapter is going to be sort of the 360-degree view with the customer and how we data mine across all the channels has got a lot of opportunities still in front of us.

Michael Binetti - UBS Investment Bank, Research Division

Interesting. From the audience, can you talk a bit about the difference between conversion rate online versus in-store, and how an omnichannel strategy can help lever that metric?

Karen M. Hoguet

They're not really comparable. I mean, I don't even know how you'd compare. And by the way, I don't know really how to measure conversion in the store, because we don't track traffic, so I don't really even know how to answer that. I can tell you, online, our conversion rate has gone up significantly over time, which is great in and of itself, but what makes it even better is that mobile devices tend to have less conversion. Largely, because often it's a smartphone looking for information, walking through a store or walking around the city. And our conversion has gone up in spite of the movement of traffic away from desktop. So we feel good again about that and a lot of that has to do with the quality of the merchandise, has to do with the fact that we're now fulfilling orders from stores. So you're less likely to -- or you're more likely to find what you want, less likely to experience an out of stock, and that's all helping also.

Michael Binetti - UBS Investment Bank, Research Division

Got it. Talk about the Millennial strategy that you brought up for a minute. You announced it last year, I suppose every retailer should be looking at its customer base and challenging itself to move to the younger customers as the one it has already won, continues to age. Losing relevance to the next generation seems like the one-way street to nowhere in retail. But -- now a very clear example, I would say, in the retail world today of what the cost it can be if you alienate the customer or if you try to take your brand to an unnatural place in your customer's eyes, so tell us a little bit about the approach that you'll be as you go through 2015 and open your Millennial strategy in Herald Square? How are you going to engage that consumer incrementally while keeping an eye on protecting the core at the same time?

Karen M. Hoguet

I think the key thing is, I think it's been about 3 years that we've recognized there was this big part of the population that's very diverse, growing very rapidly and is our future, and that it was not our strong spot. And so we started doing a lot of research and a lot of soul searching. And again, not meaning to oversimplify it, but what we realized is the millennial customer, which demographers just tend to call millennial, we really see as 2 segments, and really 4 if you want to split it by sex. But -- and younger and an older. And the younger millennial, which you equate to our Junior business or what we call mstylelab, we've been -- and that's where most of the teen retailers have always competed. We've had for years, we've had good years, we've had bad years, and we've done that business. What we discovered was there was what we call whitespace where a customer group that we really didn't have anything in major degrees to offer, which was the older millennial customer. Sort of the 20- to 30-year-old customer, particularly on the feminine end. And when you look at our ready-to-wear assortments, yes, there were some brands that would appeal to that customer or who were trying, but when we really looked at ourselves in the mirror, realized we were missing the boat completely. So we have restructured how we think about the millennial customer, again, primarily on the female side. We've put our best merchants into that part of the business and we've actually restructured how they work in, really, 2 major ways. One, is we've taken a lot of responsibilities away from them, related to what I would call the business aspects and created a business manager job. The reason for that is we want our merchants focused on product. Because for that millennial customer, you've got to have a fashion right, you've got to be focused on product. The second thing we did is we changed the work environment and made it much more open and put everybody that was working on the millennial business together. So as opposed to the way we're typically officed, where you have the merchants together and the planners and our private brand people separately, the dot com people separately, we've created an environment where they can all work together on the same floor. The private brand people are there, the merchants are there, and we're finding that to be a really great way of developing product. And by the way, the problem with our offering always starts with product. So they're in the process of launching 13 brands, I believe 8 of which will be actually launched this year. We sell Marilyn Monroe is one, we're coming up with a kids product. There's a whole host of products, some of which we're doing ourselves, some of which we're doing with our major vendors, but it starts with product. And again, as these lines rollout, that are focused on both age brackets and millennial, but again, a real focus on that older millennial, we think we've got the product that's really going to attract that customer in a major way. It takes time to develop brands, so they're going to be launched through the year, and that's why I've said it's really going to help our growth more in '14 and '15 because the way we launched brands as we test it in x number of stores that are a wide range of population types and weather types to see how it works, but then we'll start rolling from there. So again, it'll take from to '14 to '15 to get these products rolled out. The other thing we're doing is trying to attract this customer, and we call it sort of the impulse area, the older millennial, with cosmetics and home goods and handbags and shoes everywhere across the store and we're very excited about all of this, and we do think we're going to be able to make a difference. Obviously, you also then have to think about how you market to that customer, because it's going to be different than marketing to me. And also, the store environment we're trying to work on, as well as the kind of people we hire into these areas, so it's really a comprehensive strategy. So as with everything we do, started with research, moved on to product and we'll test and learn and keep going, but we are really excited about the opportunity here.

Michael Binetti - UBS Investment Bank, Research Division

What's the merchandise category that Macy's has the largest opportunity to improve productivity in 2013?

Karen M. Hoguet

Millennial.

Michael Binetti - UBS Investment Bank, Research Division

In 2013?

Karen M. Hoguet

Well, in 2013 -- okay, in 2013, look, millennial may be early for '13, so that maybe '14, '15. As I think about it, there are businesses that we call authoritative destinations that we are really focused on because we believe this is what people start thinking when they think Macy's. It's the center core categories, shoes, cosmetics, handbags, jewelry. And It's also men's, which has become a very critical category for us in terms of competing. The other category where we're seeing enormous growth is big ticket furniture and mattresses and some of the home categories, home textile, luggage. And I think we're going to continue to see enormous growth from these categories as we move forward in '13 and beyond.

Michael Binetti - UBS Investment Bank, Research Division

In the home category, it's one category that, as you integrated in 2000, the May and Federated merger, we saw a lot of changes in the home categories or existing in those stores, some of them came out, some of -- you rethought where you wanted to have a big home category with the furniture business, the big-ticket items. Now the Internet is actually making obviously, having a big impact on what kind of inventory you need to carry, how much footage you need to dedicate to that. What are you learning about that category as...

Karen M. Hoguet

Very interesting. I mean, again, here's where testing really helps. Going online with furniture has been wildly successful in driving store business as well. So we do a lot of business online, which is actually seen online but you do need to make a phone call at the end. But many of our top 10 salespeople are literally our phone people who are taking the orders over the Internet. And the reason for that is the complexity of furniture delivery. Even though we'd all like to say self-service makes sense, we can service the customer a whole lot better talking, whether the intricacies of your house, your apartment, make sure we're prepared to deliver the furniture appropriately. But what it has really done is told a lot of customers who didn't know we offer these products that we offer them. And they do a lot of research online, and when they come into the store, often it's just to sit on a sofa, sit on a couch, see a fabric. And it makes the time that a sales associate spends with the customer on the floor a lot less, so it has really helped the growth of that business, and we're very excited about that on an ongoing basis.

Michael Binetti - UBS Investment Bank, Research Division

So this is a fairly high level and simple question that came in from the crowd. And you've been there 100 times and I know you answered me, but I want to hear why it'll be there. So what will be -- in 10 years, will the Internet be a positive or negative?

Karen M. Hoguet

I'm not sure I understand. How could it be a negative?

Michael Binetti - UBS Investment Bank, Research Division

Well, let's ask -- I'm assuming, if somebody said, perhaps, Amazon gets into the fashion business in bigger size.

Karen M. Hoguet

Well, look, I really believe that in the fashion business, having stores is always going to be a competitive advantage. Also, remember, as we go to faster delivery windows, we have 800 stores. It's going to be pretty easy to reach most of our customers pretty quickly without having to build incremental infrastructure. But I also think the nature of the fashion customer is that, I think it's still going to be really positive for us. Remember what I said about social dresses, which is at one end of the extreme, you need to return a lot. That model just isn't going to work as well. By the way, that doesn't mean there aren't customers who will buy that way. I'm not that Pollyannaish, but I think at the end of day, it's still going to be positive because it's helping our business dramatically.

Michael Binetti - UBS Investment Bank, Research Division

So we have about 2 minutes left. So if you have a question, just bring it up. Let's shift to the numbers, since you're in the corner of the financial office. Over $2 billion in operating cash flow, $925 million in CapEx, what do you think is the optimum use of cash flow going forward? Is there a change in the way you're looking at it in 2013 forward versus how you've looked at it the last 2 years?

Karen M. Hoguet

No. I think we've always been paying a competitive dividend and using the excess cash to buy back stock. I don't see any difference in that.

Michael Binetti - UBS Investment Bank, Research Division

I mean, you're in a business that has a lot of volatility. And obviously, as we talked about in the opening comments, you've been there through the worst of times, but you've had a more stable run than I would say, department stores have.

Karen M. Hoguet

I don't want to jinx it.

Michael Binetti - UBS Investment Bank, Research Division

But if you think about that and you think to yourself, does the dividend go higher? Or, I mean, are you more comfortable taking dividend a little bit higher than spend in-store fees that...

Karen M. Hoguet

Let me stick to what I had said, I'm not going to comment specifically. We feel very good about the sustainability of the cash flow. I mean, the company has transformed itself. And yes, there'll be better and more serious in retail. Hopefully not, but there could be another recession, but our cash flows are pretty resilient even through to that. What people tend to forget what department stores, is that we are more stable. And if you think within a 3.5% comp, we've got some businesses that are way double-digit, we've got others that aren't. Somebody asked me the other day, what if women's apparel, which has been a tougher category, suddenly starts comp-ing like handbags, what'll be your sales base? I said, that's an unfair question, because I can answer that mathematically. But realistically, if something goes up, something else goes down, and what's been nice about department stores over time is the consistency of improvement and the resiliency of the cash flow. So it's always been a really good story from that perspective, not as sexy as some of the really high-growth categories, but they don't fall as far either. So it's much more reliable year in, year out. And what's been nice for us is with the transformation of the company and the opportunities that the Internet has provided for us as a way of getting a lot more store growth without adding square footage really makes the formula quite good.

Michael Binetti - UBS Investment Bank, Research Division

We're out of time. I'm going to sneak one last question in for you that we asked this to a lot of retailers last year. You've just guided for the year, you've been out meeting with investors, you've done a few conferences. Now, you know the questions that are being asked to you most here. Based on what you've heard and we come back a year from now, what is this crowd going say, "It really surprised me on this." What is the thing that people are doubting you the most?

Karen M. Hoguet

I hope there's no surprise, that you believe what we're saying.

Michael Binetti - UBS Investment Bank, Research Division

Where are people doubting you most.

Karen M. Hoguet

I don't know at this point. It's -- I don't know, sorry.

Michael Binetti - UBS Investment Bank, Research Division

Good enough. Well, thanks for the time. Thanks, everybody.

Karen M. Hoguet

Thank you all very much.

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