Macy's Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.13.13 | About: Macy's Inc. (M)

Macy's (NYSE:M)

Q3 2013 Earnings Call

November 13, 2013 10:30 am ET

Executives

Karen M. Hoguet - Chief Financial Officer

Analysts

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Paul Swinand - Morningstar Inc., Research Division

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Stacie Rabinowitz - Consumer Edge Research, LLC

Paul Trussell - Deutsche Bank AG, Research Division

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Lizabeth Dunn - Macquarie Research

Michael Binetti - UBS Investment Bank, Research Division

Jeffrey S. Stein - Northcoast Research

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

David J. Glick - The Buckingham Research Group Incorporated

Priya Ohri-Gupta - Barclays Capital, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Michael B. Exstein - Crédit Suisse AG, Research Division

Rob Wilson - Tiburon Research Group, Inc.

Brian Roenick

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Craig Hutson

Bernard Sosnick - Gilford Securities Inc., Research Division

Operator

Good day, ladies and gentlemen. Welcome to the Macy’s, Inc. Third Quarter 2013 Earnings Conference. As a reminder, today's conference is being recorded. And at this time, I'd like to turn the conference over to Ms. Karen Hoguet. Please go ahead.

Karen M. Hoguet

Great. Thanks, and good morning. And welcome to the Macy’s, Inc. call scheduled to discuss our third quarter earnings. I am Karen Hoguet, CFO of the company.

Any transcription or other reproduction of the statements made in this call without our consent is prohibited. A replay of the call will be available on our website, www.macysinc.com, beginning approximately 2 hours after the call concludes. Please refer to the Investor Relations section of our website for discussion and reconciliations of any non-GAAP financial measures discussed this morning.

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

We are very pleased with our third quarter performance. We produced a comp store sales increase of 3.5% or 4.6% on an owned-plus-license basis, is 30-basis-point increase in EBIT rate, and a 31% increase in diluted earnings per share. This is an improvement in trend from the first half of the year and it makes us cautiously optimistic about our outlook for the fourth quarter.

Sales in the third quarter were $6,276,000,000, up 3.5% on a comp basis. This is on top of a 3.7% comp increase last year in the third quarter. This is towards the higher-end of our guidance of 2.5% to 4% for comp sales growth in the back half of the year.

Including license sales, comp sales were up 4.6% in the quarter. This is the most comparable metric for customer demand. This is particularly true this year because we have converted businesses like athletic shoes from being owned to being licensed. The owned comp dollars would be 0 this year for these businesses against, obviously, a big number year ago, so making the comp sales somewhat misleading. And this 4.6% on an owned-plus-license basis compares to 2.4% in the first half of the year. This is over a 2-point improvement in trend.

As we said at the end of the second quarter, we felt we had to intensify our marketing and enhance our value offering to drive the business in the current economic environment. We did both and we are happy to say it paid off. The customer responded well to the cleaner and bolder look to our sale advertising, some new promotional handles and great values on fresh merchandise. We also improved graphics and visual merchandising in the stores and on our website in order to make our sales and values more obvious. This was a real team effort.

During the third quarter, the number of transactions increased approximately 1%, which has improved versus the first half of the year when the transaction count was roughly flat. Units per transaction was up 2% in the third quarter versus being flat in the spring and our average unit retail was up slightly in the quarter. And remember, last year, our average unit retail in the quarter increased 4.5%. Also, as evidence of the success of the changes that we made is the fact that the change in trend was very widespread geographically. Sales improved across all of the Macy's regions in the country in the third quarter, with particular strength across the South and in the Northeast. Bloomingdale's had a strong quarter as well.

We also saw broad-based strengthening across all major categories of business. There are lots of good news stories and only a few weaker ones. Starting with women's apparel, we are pleased that this category has continued to strengthen. The season change was positive for this business with our customer responding very well to the newness.

Our strength in private and women's apparel was driven by our private brands, cashmere, dresses, suits, coats and active. And our Impulse business, which is aimed at the older millennial customer, had a great quarter, including a terrific launch of a new private brand, Maison Jules. And while sales in juniors continued weak in absolute terms, the trend did improve versus that in the first half of the year.

Sales in the Center Core categories continued their very strong performance, driven by handbags, cosmetics, fine jewelry, intimate apparel and boots. The trend in watches did, however, slow somewhat in the quarter.

Performance in men's continued good, with particular strength in active, tailored clothing and cold weather merchandise.

And our home business was outstanding, with particular strength in home textiles, housewares, furniture and mattresses. Luggage was the one category within home that weakened in the quarter.

Looking at the third quarter, we are particularly encouraged by 3 trends that bode well for the fourth quarter. One, the traditional gift categories are trending very well. This would include businesses, such as fine jewelry, cosmetics, cashmere, handbags and housewares. The second encouraging trend is that the cold-weather businesses were all strong: coats, boots, sweaters, et cetera. If we have anywhere close to a normal weather pattern this year, this could add significant volume. And the third encouraging trend was the stronger growth in women's apparel businesses, including that of the older millennial customer, which is always great for our business.

Turning to gross margin. The gross margin rate in the quarter was 39.2%, down 40 basis points versus last year. This is in part due to the increased shipping cost associated with our omnichannel business. But our merchandise margin was down as well in the quarter. Fortunately, we were able to more than offset this reduction with a 70-basis-point reduction in SG&A as a percent to sales. Expense in dollars grew only 1% over last year for the third quarter in spite of the continued omnichannel investment and the added marketing expense. We benefited in the quarter from the leveraging from the stronger sales. Also, depreciation and amortization was $12 million below last year and our credit profitability increased $8 million over last year. As expected, the benefit from credit was much less relative to a year ago than that experienced during the first half of the year.

Operating income in the quarter was $360 million, up 11% over last year in dollars and 30 basis points higher as a percent to sales. Interest expense was $96 million versus last year's $103 million and tax expense was $87 million compared to last year's $77 million. The effective tax rate was below last year in the quarter. We now expect our annual effective tax rate to be approximately 36%, which is approximately 95 basis points better than what we expected at the start of the year due to our securing the benefit of additional state and federal income tax credits and settlements throughout this year.

Net income in the quarter was $177 million, 22% above last year's $145 million. Average diluted share count in the quarter was 380.2 million shares, down 7% from last year's 407.9 million shares. And earnings per share on a diluted basis was therefore $0.47 or $0.31 -- 31% above last year's $0.36 per share.

Inventory at the end of the third quarter was up 7% over last year and consistent with our plan. As I discussed at the end of the second quarter, this increase was caused by the calendar shift, with last year having the 53rd week, there are unusual inventory comparisons at the end of each quarter. We aim to have inventory in our stores on the same calendar date regardless of when it falls in the fiscal calendar, since that helps customers shop. So for example, the last day of the third quarter this year was November 2 versus last year when it was October 27. So receipts in the first day of November were booked in the third quarter this year and the fourth quarter last year. And also, with our November sales growth planned significantly higher than that in December and January due to the compressed calendar and, to a lesser extent, the year rounding on Sandy, we needed to be sure we had stock in stores and in warehouses to support our growth. By year end, however, we do expect inventories to be back at a more normal level of increase relative to the prior year.

This inventory increase, net of payables, was the primary reason the net cash provided by operations was $70 million below last year. But remember, this is due to timing.

Cash flow from investing activities was $74 million favorable to last year. So cash flow before financing activities was $4 million above last year. We utilized $447 million to buy back 10.1 million shares in the third quarter. Year-to-date, we have bought back 27.6 million shares for $1.25 billion. We also issued $400 million of 10-year debt during the quarter with a coupon of 4 3/8.

As you read in our press release, our guidance for the fall season is unchanged. For comp sales, we are expecting 2.5% to 4% for the back half of the year. We do expect continued pressure on our gross margin rate in the fourth quarter, but hope to be able to offset it with lower SG&A as a percent to sales. Year rounding on the 53rd week, however, does put pressure on the SG&A rate. And we continue to expect our annual earnings per share on a diluted basis to be $3.80 to $3.90.

So while we are very satisfied with our performance in the third quarter, all eyes at Macy's and at Bloomingdale's are now focused ahead to the fourth quarter. And we are very excited about what we see for the holiday season. We feel especially prepared this year. Our merchants have outstanding assortments planned for every store and online. Our stores, macys.com, bloomingdales.com and our mobile apps are being continuously improved to enhance the customer shopping experience. We have more fulfillment capacity, including 4 online fulfillment mega centers, as well as 500 Macy's stores now equipped for shipping. And you will be seeing very compelling marketing again this year.

This year, as you know, we have 6 fewer days between Thanksgiving and Christmas. So the holiday shopping season will be shorter and more intense. We expect a heightened sense of urgency among customers, so it's important that we be ready for her every day, every time and every way she shops. Our promotional calendar is full of great fashion and gifts with great value.

And speaking of gifts, the merchants have been working all year on a fabulous assortment of items, especially for Macy's from our stars, Polo Ralph Lauren, Tommy, Calvin Klein, Michael Kors and others. You will see these store gifts in every door and in the spirit of My Macy's, they are being tailored by region. There will be no doubt that Macy's is the holiday headquarters for gifts.

We are mindful of mitigating factors, such as the economy and the shorter season, so we have redoubled our efforts to notch up our holiday execution. We believe we are well positioned to capture more than our fair share of the business. We hope you are as excited as we are about what you will be seeing at Macy's and Bloomingdale's in holiday 2013.

And now, I'm happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our take our first question from Matthew Boss from JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Karen, at the June Analyst Day, you outlined an algorithm, it was pretty impressive, 5% top line, equating to 15% net income and a 20% earnings growth profile. Any changes to the plan as we think forward? And with that, your appetite for potentially increased capital allocation, if the backdrop were to stabilize through holiday?

Karen M. Hoguet

So, as we look at it, there really hasn't been a change. Our strategies are working, our outlook is really unchanged. And we're always looking for opportunities to invest our capital wisely. But at this point, I think our budget for next year, which is approximately $1 billion, give or take some, is what we expect to spend.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Okay, perfect. And then, from a marketing and promotional standpoint. I mean, it sounds like you guys stuck to the outlined game plan, the more aggressive game plan you talked about last quarter. Can you talk about some of the changes that worked in the quarter? And as you talk about doubling down into the holiday, what incrementally we should think about into 4Q and into the holiday here?

Karen M. Hoguet

Well, I think what we did is when the second quarter started, we looked at some of our promotional events and decided that, perhaps, they had become a bit stale. So we changed some of the promotional handles. For example, added Doorbusters and Deals of the Day as opposed to morning specials. We looked at the actual items that we had been promoting and decided some of them needed to be changed or freshened. And we spent a lot of time analyzing which items drove other business, what we call radiated sales, so that we could do this intelligently. We also worked in the stores to make the visual better for the customers in the stores, to see the values that we were offering. So as I said, it was a complete team effort. The stores, the websites, marketing, merchants, everybody was involved here.

Operator

We'll take our next question from Paul Swinand from Morningstar.

Paul Swinand - Morningstar Inc., Research Division

You talked a little bit at one of the conferences about omnichannel and localization. I'm wondering if you're doing promotions or omnichannel marketing that's leveraging the localization that you're getting out of My Macy's?

Karen M. Hoguet

Well, when we do marketing, we are doing localized marketing when there's a particular item or event going on in that community, things like the Kentucky Derby or sporting events. So that is happening. But so much of the marketing is more nationally driven. But when you think about the localization of assortments, often its sizes, colors within our major brands, it's not completely different merchandise, so the national marketing works well.

Paul Swinand - Morningstar Inc., Research Division

Got it. Interesting. And then kind of on the same lines, with the license sales, is that driving incremental traffic and are they marketing both online and nationally as well in coordination with you?

Karen M. Hoguet

They are. And we believe that for businesses like Finish Line or Sunglass Hut, some of the big installations, we do think it helps traffic and it's just part of the overall plan for getting more customers in the door.

Paul Swinand - Morningstar Inc., Research Division

You mentioned analyzing incremental or ancillary sales from the traffic. Is that also resulting in sales to other departments?

Karen M. Hoguet

In some cases, yes.

Operator

And we have a question from Charles Grom from Stern Agee.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Karen, on your -- on the second quarter call, you called out -- I mean, you referenced some crowding-out concerns. Just wondering if you feel as if those pressures abated or did you guys just simply execute better here because there's a pretty big swing in your comp from quarter-to-quarter.

Karen M. Hoguet

Well, I think as we said at the end of the second quarter, we needed to make some tweaks in what we were doing, keep the fundamental strategies, but perhaps execute slightly differently. And we spent the second quarter putting it all together and working together as opposed to overreacting too quickly. And what we changed did work in the third quarter, as you can see. Business was strong in August and September, strengthened in October, but it was strong all quarter.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. Good to know. And then just first half of the year, you also called out that budget shopper is being a little bit weaker, but appears that the value message resonated a little bit more. Any thoughts on that customer demographic?

Karen M. Hoguet

Well, it's hard to tell. Once again, we're reporting first. So we need to wait and see how other people did. I think we did well with that customer in the quarter, but, again, I have to wait and see how our competitors did.

Charles X. Grom - Sterne Agee & Leach Inc., Research Division

Okay. Then just the last question on the guidance, the implied fourth quarter view. It looks like you're projecting, roughly speaking, about say 50 basis points of margin compression versus last year despite going against your easiest comparison of last year. So just wondering, is that mainly the cycling of the 53rd week or is there some credit gift pack, just can you help us out on connecting the dots there?

Karen M. Hoguet

I'm not sure how you came up with that estimate, so maybe we should talk offline. That doesn't sound right.

Operator

And we have a question from Kimberly Greenberger from Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Karen, I'm wondering if you can just talk to us about your philosophy in terms of SG&A management. I think there was, obviously, a really nice surprise here in the SG&A expense in the third quarter. How do you think about monitoring your business as it's unfolding and whether to release SG&A dollars or pull in SG&A dollars? And was there any sort of concerted effort in the quarter to be really sort of lean with the SG&A budget?

Karen M. Hoguet

I think Macy's has always been very disciplined on the expense line. And we always try to be lean but appropriately investing in growing the business. And I think the third quarter demonstrated that again. We did invest in marketing, as we said we were going to do. And still, from the bottom line perspective, did a terrific job, I think, in terms of the SG&A performance. But we are always disciplined and always looking for ways of being more efficient. I don't know that we did anything differently in the third quarter.

Operator

And we have Stacie Rabinowitz from Consumer Edge Research.

Stacie Rabinowitz - Consumer Edge Research, LLC

So you've been talking on the call about the difference in the marketing this quarter. And you've been talking a lot about choosing different items: better, bolder, different kinds of advertising and messaging. Was there anything, any point, any category where it was just plain deeper discounting, or was it really just a more targeted, better executed marketing strategy?

Karen M. Hoguet

No, it really was just more targeted, better strategy. I would not say there was any wholesale deeper discounting going on. Did we give some additional value? Yes, in some places, we did. But nothing that obviously hurt the bottom line of the company in any dramatic way.

Operator

And we have a question from Paul Trussell from Deutsche Bank.

Paul Trussell - Deutsche Bank AG, Research Division

Just going back to your comments on the cadence of the quarter. You mentioned that October, you saw some accelerated demand. Could you just speak at all to kind of the magnitude of October's results versus earlier in the quarter?

Karen M. Hoguet

Well, there's a lot of focus on October. I'm not quite sure why. The whole quarter was very strong and October did get stronger. But from my perspective, I'd focus on the third quarter in total. But the strategy worked right out of the gates.

Paul Trussell - Deutsche Bank AG, Research Division

Okay. And then early on the call, you spoke about capital plans for next year likely being in that $1 billion range once again. From that standpoint, is the leverage target still 2.4 to 2.7? And if that is the case, given how well the cash flow generation, the EBITDA growth has been, are you still open to adding debt to the balance sheet either this year or next?

Karen M. Hoguet

I think the easiest way of answering that, Paul, is that it is still the credit rate targets, the 2.4 to 2.7. And my guess is we would stay towards the middle of the high -- lower end of that as opposed to levering up too much. But again, with the EBITDA growing, there is some capacity.

Operator

And we have a question from Paul Lejuez from Wells Fargo.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Karen, just wondering if you can quantify, on the gross margin line, how much the shipping cost hurt that line versus the merchandise margin decline? And then just wondering about any specific categories that, perhaps, took the brunt of the merch margin compression or was it more broad-based?

Karen M. Hoguet

It was broad-based. And we don't break out the components of margin that way.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Got you. And how about the performance of mall stores versus off-mall stores, Karen?

Karen M. Hoguet

We don't have many off-mall stores. I mean, we have the big freestanding stores like Herald Square, 59th Street, but almost -- most of our stores are in malls.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Yes. Any comment on that store, how the progress is going in terms of the refurbishment and what's that doing to business in the Herald Square store?

Karen M. Hoguet

Yes, the progress is terrific. The first and second floors are just about all open again for business, look terrific. And the renovated areas are exceeding our expectations. So we feel really good about what's been done down here.

Operator

And our next question is from Liz Dunn from Macquarie.

Lizabeth Dunn - Macquarie Research

I guess as we look at this earlier opening, the Thanksgiving opening, are you looking at the fact that more people are doing it this year as an opportunity because there will be more traffic and more excitement around it, or do you think it's, perhaps, more of a risk because there will be more places for the consumer to go?

Karen M. Hoguet

No, I think that would be an opportunity, if you look at it on a balance.

Lizabeth Dunn - Macquarie Research

Okay. As we think about these licensed categories, is the net financial impact positive or are you looking at that more as just being able to offer kind of better merchandise to your consumers? And did you see any lift in adjacent categories to those categories that you licensed?

Karen M. Hoguet

Yes. What we do is, as we're looking at licensed categories, it's always driven by assortments we want to offer the customer. So for example, in the case of athletic footwear, we were not able to offer the best brands, the best shoes within those brands to the customer on our own. And by partnering with Finish Line, we've been able to do that. So it's always driven by trying to give our customers the best assortments we possibly can. And we often find that it helps. So for example, I think the athletic footwear business is helping our active business, as well as some of the millennial categories. So I think that's good for us. And I believe Finish Line, it's been good for them as well.

Lizabeth Dunn - Macquarie Research

Do you think there are any other big categories to do this in?

Karen M. Hoguet

I would say there's some smaller categories, but at this point, I can't think of anything of major size. But again, we're always looking to be able to offer the customer merchandise that we think she expects from Macy's and try to get it in the best way that we can.

Lizabeth Dunn - Macquarie Research

Okay. And then final question. Can we just have a little bit more color on the performance of Bloomingdale's during the quarter?

Karen M. Hoguet

Yes. I'm sorry, we always tend to focus on the 90%. Bloomingdale's had a very good quarter and improved their trend relative to the spring season as well. So I would say, it's fairly comparable performance deltas and continues to do well.

Operator

Our next question is from Michael Binetti from UBS.

Michael Binetti - UBS Investment Bank, Research Division

Karen, so I'm -- really quickly just on the near-term here. It looks like the comp for the fourth quarter could be anywhere from about 2% to 4%. And you've obviously been ahead of it and had a good read on what the promotional environment need to be for the year. With all that given, when you sat down and thought about the range for the fourth quarter, what do you think it takes to get to the high end of that range?

Karen M. Hoguet

Well, I mean, it's a good question. I'll stop and think about it. Obviously, a little help from the economy would always be helpful to that end and it would just have to mean that our assortments and execution was even that much better than our peers. And I think would be the 2 factors, I would think. And also, by the way, weather.

Michael Binetti - UBS Investment Bank, Research Division

Right. It sounds like you're pretty happy with November trend so far. I guess how do you gauge how much of what we're seeing is really calendar comparison-related versus a true pickup in demand, since the 6 fewer shopping days you mentioned will compress December? I guess...

Karen M. Hoguet

Well, again, if you look at the third quarter, we were pleased throughout the quarter. So that's really what our optimism is based on.

Michael Binetti - UBS Investment Bank, Research Division

Got it. And then just my last question. So in the quarter there was a nice article run about you guys significantly increasing the space you're allocating to the athletic brand. I mean, maybe you could talk a little bit about why the time is now to get bigger there, what did you learn. And I'm always, frankly, impressed with how quickly these things are rolled out in your stores after you mentioned it in an article. So how soon will we see more of these Nike, Under Armour, North Face's shops rolling out through your stores?

Karen M. Hoguet

Well, it's no surprise that active has become an important part of what customers are wearing and needing. Sometimes it's for athletic endeavor, sometimes it's just to run errands. And we've solid big opportunity here and, in fact, that's what is happening in terms of performance in the stores.

Michael Binetti - UBS Investment Bank, Research Division

How fast do you see that rolling out?

Karen M. Hoguet

Well, all of -- most of our stores today have active and we'll just be expanding them as we see opportunities, again, from a My Macy's perspective, with what kinds of assortments.

Operator

And our next question is from Jeff Stein from Northcoast Research.

Jeffrey S. Stein - Northcoast Research

Karen, could you talk a little bit about the millennial brands that you've introduced this year. You've called out Maison Jules as one of your more successful brands, but wondering about some of the others you've introduced. And it seems that most were rolled out to a limited number of doors for fall. So I'm wondering, based on the performance that you've seen from all of the brands collectively, should we look for a material expansion as we head into spring?

Karen M. Hoguet

So I think you'll see big expansions as we go into next year. As I said, that business has done very well. Maison Jules has been particularly successful. I think it's probably the first private brand launch that we've done that was done through the lens of My Macy's. And we actually put different assortments in different regions and different colors and different sizing. Plus, we also incorporated the omnichannel strategies. So there's tagging on the merchandise that offers extended sizes and colors online. So interestingly, Maison Jules is the first time we've launched a brand where we had, what I would call the whole MOM strategy encompassed, and it's been very successful. I would say some of the other brands have -- some have done well, some have done less well. And sometimes it just takes time for a new brand to be tweaked and fine-tuned and improved. But by and large, we feel very good about the brand launches and do expect to have quite a bit of rollout as we go into '14.

Jeffrey S. Stein - Northcoast Research

Great. And with respect to your online business, can you talk about the momentum in Q3 relative to Q2? Because I understand, if I remember correctly, that you did see a little bit of weakening in Q2 in your online business. And what's going on with respect to how you're achieving your growth? Is it more transaction-driven, average unit retail or both?

Karen M. Hoguet

Well, the online business, as we said, when we stopped reporting it separately, is getting just so hard to measure because so many customers are shopping online, going in the store to buy and vice versa. So it really is hard to break it out and say that -- having said that, the business has not weakened and is very strong. Now that may be customers on the smartphone in the store, but nonetheless, if you look at online transactions, it's done very well.

Jeffrey S. Stein - Northcoast Research

Great. Great. And from a marketing perspective, are you also planning to increase your marketing as a percent to sales in Q4 if you hit your comp guidance range?

Karen M. Hoguet

I can't be that specific, Jeff.

Operator

And our next question is from Richard Jaffe from Stifel.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Karen, just a question on the junior's business. It seems like mstylelab is an opportunity and any thoughts of why that hasn't performed as well as the better junior's and what might be done in time for Christmas?

Karen M. Hoguet

Yes -- no. It's been a tough business for us, as you know, for a while. We did begin to see some improvement. Now we are making some changes in the assortment, getting a little bit more key item-focused. And we're feeling a little more encouraged, but we are getting much more success with that older millennial customer through the Impulse category.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

And just a quick thought on the effectiveness of the in-store fulfillment of e-commerce sales. Any way you can share that with us, or that you've been able to gauge how well it's been working?

Karen M. Hoguet

Well, it's been working extremely well. Our stores have done a terrific job executing it and are almost as fast and accurate as our mega centers. So that's really very good news. But the real benefit of the store fulfillment, actually, has -- and hopefully, I can do this simply -- but it is enabling us to put fashion assortments into all of our doors, whereas we might not have done so before having the ability to use that inventory to satisfy internet demand. What it's doing is helping our stores have more fashion, better assortments and getting more four-wall growth, in addition to obviously efficiently getting the goods to our internet customer. The great example of that right now on the floor is cashmere, where we have stocked significantly more fashion colors in all of our Macy’s stores and much less inventory in our mega centers for the fashion colors, so that our stores look better and are growing faster. And at the same time, then, satisfying internet demand from that inventory. So it's really the omnichannel dream.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

And the in-store fulfillment, is it meaningful yet or still on the very early stages?

Karen M. Hoguet

No, it's meaningful. I mean, you've got 500 doors and my guess is we'll roll it out to most stores by next year. It is meaningful.

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Could it someday be a majority of your fulfillment?

Karen M. Hoguet

I don't think it'll ever be a majority, but it does enable us to get inventory closer to the customer. One of the things we were testing as of this quarter is "buy online, pickup in store," which based on early reads, I think will for sure be rolled out next year. And so that's another capability that is allowing us to get merchandise to the customer faster in a way that she likes.

Operator

And we have a question from Lorraine Hutchinson from BoA.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Karen, I just wanted to follow up on the merchandise margin. Do you expect pressure to intensify in the fourth quarter? And then how are you thinking about the need to continue to provide that kind of value in the first half of next year?

Karen M. Hoguet

Yes. I would say the pressure will continue. Don't know that it will intensify. I may get more thoughts on that as I see others report and hear what they're seeing. But I do expect it to continue. And in terms of spring, it may continue, but I don't think -- I'm not sure yet on spring. We'll have to see.

Operator

And we have a question from David Glick from Buckingham Research Group.

David J. Glick - The Buckingham Research Group Incorporated

Karen, most of my questions have been answered. I just thought, perhaps, you could give us a little more color on women's apparel. It sounds like the moderate businesses are picking up a bit in the seasonal categories. I'm just trying to get a better understanding on sort of moderate versus better trends and how much is really driven by sort of the stronger value message and the favorable trends in seasonal apparel?

Karen M. Hoguet

Well, I think a lot of it has to do with the fact that the fall fashion is both wearable and interesting and the customers are responding well. We have consciously gone after that opening price point business lately and have been very successful there. Also getting a benefit from the cold weather goods: sweaters, cashmere, coats, et cetera. Active, because as we talked earlier, both true active and at-leisure is an up-trending category. Private brands are doing well. INC is very strong, as our other of the regular price -- I'm sorry, the opening price point brands. So it's really fairly broad-based.

David J. Glick - The Buckingham Research Group Incorporated

So that doesn't mean your better brands, which have been a real strength for you over the last several years, that doesn't mean they're slowing down, it's just better performance at the moderate level?

Karen M. Hoguet

That's correct. That's correct.

Operator

And we have a question from Priya Ohri-Gupta from Barclays.

Priya Ohri-Gupta - Barclays Capital, Research Division

Just 2, if I may. One, I was wondering if you might be able to talk a little bit about your inter-quarter traffic trends from month-to-month? And just secondly, I was hoping you might be able to give us a little bit more context around how you think about that issuance, given that you do look to be sort of in the low to mid range versus your target. You did come to market in September, but it was only for $400 million. Any thoughts as to why sort of that wasn't a higher figure, given the capacity you have, and do you look to come multiple times a year? Just any color you can provide.

Karen M. Hoguet

I think the only color I can provide in terms of debt issuance is what we've said, which is, again, expect us to be in the mid- to lower end of our range, targeted range of the 2.4 to 2.7. And that's really all I can say on that. And then in terms of trends during the quarter, as we have said, the August-September period was strong as was October. So I don't have the traffic patterns or the transactions by-month in front of me. But it wasn't like business have been weak and suddenly got strong in October.

Operator

[Operator Instructions] We'll take a question from Dana Telsey from Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

Karen, your license businesses seem to be gaining traction and help to add traffic also. On the existing licensing business, anything different that they're doing that you're learning from at Macy's or Bloomingdale's? And should we be looking for new licensed businesses to be added?

Karen M. Hoguet

Not that I know of in terms of what we're learning, but I'm sure we do both in terms of assortments as well as selling service because we're always looking to learn from any of our partners. And as I said earlier, I don't expect any major new categories to be licensed. But we are always trying to find ways of improving our offering to the customer, so there may be something at some point.

Dana Lauren Telsey - Telsey Advisory Group LLC

And then just on the tax rate, does it stay at this level for 2014?

Karen M. Hoguet

At this point, I would say no. My suspicion is -- and again, I don't have the full plan yet -- but my suspicion is it will go back to the 37%-like level.

Operator

We have a question from Michael Exstein from Crédit Suisse.

Michael B. Exstein - Crédit Suisse AG, Research Division

Karen, a couple of just very quick ones. Was there less disruption to the business from the Herald Square renovation this quarter than previous quarters, number one? Number two, was women's the top-performing area in terms of percentage growth?

Karen M. Hoguet

Yes, let me do those 2, then you can continue. There was less disruption from Herald Square. There was actually as much disruption but there's more good news, so the net was favorable this year to a year ago in the third quarter.

Michael B. Exstein - Crédit Suisse AG, Research Division

And what about women's, was that the top percentage gainer for the quarter?

Karen M. Hoguet

We don't disclose those numbers.

Michael B. Exstein - Crédit Suisse AG, Research Division

And then finally, what would be the implications for the inventory if you added back the inventory that was in place in the licensed businesses that -- formerly owned businesses that are now licensed, in terms of what would be the like-to-like inventory year-over-year?

Karen M. Hoguet

Well, if you did, if -- let me give it a different way. Comp inventory was just slightly higher, Michael. So it's not a big factor. Maybe a 1%. Yes -- no, I've been focused on the versus-plan comparisons, but a slight impact.

Operator

And we have a question from Rob Wilson from Tiburon Research.

Rob Wilson - Tiburon Research Group, Inc.

Karen, the $8 million higher credit income in Q3, what should we expect in Q4? And will that be impacted by the extra week last year?

Karen M. Hoguet

Well, we have not given guidance by quarter. We have said that the back half of the year would be much less of an increase than the first half. So I don't expect anything materially different in the fourth quarter than the third quarter, but we really have not given guidance on that.

Rob Wilson - Tiburon Research Group, Inc.

So not necessary any real impact from that extra week last year?

Karen M. Hoguet

Again, I'm not giving guidance by quarter.

Rob Wilson - Tiburon Research Group, Inc.

Okay. And one last question. The tax rate, is it -- I guess my math would suggest you're expecting a higher tax rate in Q4 than the first 3 quarters of the year. Is that correct?

Karen M. Hoguet

That's correct. And that relates to the timing of settlements and the receipt of credits.

Operator

We have a question from Brian Roenick from BLR Capital Partners.

Brian Roenick

Just, Karen, in the fourth quarter, as a result of the 53rd week comparison, what do you expect the spread to be between top line and same-store sales?

Karen M. Hoguet

I'm sorry, you've caught me by surprise. My guess is it will be sort of 4.5-ish kind of points. Sort of that kind of a range.

Operator

And Stephen Grambling from Goldman Sachs.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Karen, just a bit of a follow-up to Richard and Lorraine's questions. But the guidance suggests that you'll have a third straight year of gross margin pressure and I realize part of that has been shipping from online and now some merchandise margin pressure. But can you help us frame the longer-term trajectory of gross margin and maybe specifically, address the opportunity from optimizing inventory across channels?

Karen M. Hoguet

Well, my view is, and I've said this forever, that the long-term prospect on gross margin rate should be flattish, there will be quarters and times where it goes up or down. But again, I think flattish is the right long-term perspective.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

And then when we think about optimizing inventory, and I guess this goes along the getting better fashion brands, is there any way to frame that opportunity and how big that could be?

Karen M. Hoguet

No. There really isn't. I mean, we obviously helped it as we can better optimize inventory, we can, perhaps, improve gross margin rate. But at this point, I think I'd urge people to think flattish.

Operator

And our next question is from Craig Hutson from Loop Capital.

Craig Hutson

Balance sheet-related question. By my count, you have at the end of the latest quarter, 14 issues that have a 7% or higher coupon, which makes you look considerably different than the rest of your investment-grade peers. And now that you're suddenly investment-grade and have that 2.4x to 2.7x leverage target, what is the rationale for not trying to clean up the balance sheet and go after and tender for a lot of those high-cost debt?

Karen M. Hoguet

We constantly do the math on that. And it gets to an issue of what the net present value of these kinds of transactions are.

Operator

Okay. Our next question comes from Bernard Sosnick from Gilford Securities.

Bernard Sosnick - Gilford Securities Inc., Research Division

Karen, yesterday, I was at the Bay Shore mall in Long Island where you have a new store. The retailers there say traffic in the mall has picked up since the store opened, which implies a good performance for the store. I'm wondering if you could give us a little color on that. But my main point is that the appearance of the store is really nice, but different than from what you have in your traditional stores to a certain degree. From that, can we judge that there were thoughts that you might have with regard to renovations of the stores going forward? And if so, could you give us some thoughts on that?

Karen M. Hoguet

Yes, unfortunately, Bernie, I don't know the answer to the question. I hear the store looks spectacular. We are very happy with it. I think everybody on the team has now been there, except for me. So unfortunately, I don't know the answer to your question. I'll get it and get back to you. But I know we are very pleased with how it looks and how it's doing.

Bernard Sosnick - Gilford Securities Inc., Research Division

Yes, I -- it's the positive impression that I got that caused me to ask the question.

Karen M. Hoguet

Good. Well, I'll find that and get back to you. Yes, thanks.

Operator

And we'll take our final question from Greg Hessler from Bank of America Merrill Lynch.

At this time, I'll turn the conference over, back to Karen Hoguet, for any final closing remarks.

Karen M. Hoguet

Great. I just want to thank you, all, for your support and your interest in Macy's. And, hopefully, you'll do a lot of shopping with us during the fourth quarter. Thanks, and I'll talk to you, all, soon.

Operator

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.

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