Macy's Management Presents at Citi Global Consumer Conference (Transcript)

May.28.14 | About: Macy's Inc. (M)

Macy's, Inc. (NYSE:M)

Citi Global Consumer Conference Transcript

May 28, 2014 8:10 AM ET

Executives

Karen Hoguet - Chief Financial Officer

Peter Sachse - Chief Stores Officer

Analysts

Oliver Chen - Citigroup Inc.

Peter Sachse

Good morning, everyone. We have a tradition in the store that we actually start each and every day with what we call a rally and we get our store manager, we get any associate that is scheduled in the morning that day together and we celebrate. We celebrate the previous day business. We talk about Magic. Magic selling and we talk about Mom. We have a special treat for you today. We have one of our stores here to perform one of their rallies. [Wayne] (ph)?

[Video]

All right. Come on back here GST team. Ladies and gentlemen, these are the folks from Paramus Garden State Plaza. Please give it up. [Mary Anne] (ph) would you come up here for one second, yeah, you've got to come up around the stage that way. We wanted to show you how embedded Mom is in our stores.

[Mary Anne] (ph) held a contest, they had -- anybody in the store could write a lyric about Magic and about Mom and our loss prevention team, who is right here, won the contest at Garden State Plaza.

And I will tell you, I get to a lot of stores during the year, it is my job. I get to over 100-year, I attain these rallies. This is one of the better one. That’s why we brought them here. But they all have an element of Mom associated with them, because that is our strategy as Karen has told you time and time again.

We have another tradition in the stores. We have something call the Magic Card and when something -- anybody does something pretty cool, we write a Magic Card and it’s about making magic everyday in our stores and this is to all of you guys.

So to the GST team from Peter and Karen, you blew me away when I visited the store. You amazed the executive committee when they came last month and you made Karen and I very proud today, quite simply, you all our, the magic of Macy’s.

Karen Hoguet

Thank you, guys.

Peter Sachse

Good job guys.

Oliver Chen - Citigroup Inc.

That was the best start to Citi Global Conference we’ve ever had.

Karen Hoguet

We try, you know…

Oliver Chen - Citigroup Inc.

And we…

Karen Hoguet

Get everybody awake.

Oliver Chen - Citigroup Inc.

Yeah. It’s all about retail. It’s all about retail and magic of the store people to covert into opportunity. And what’s great about your strategy is how you have been a lot of things to different people in the omni-channel environment. If you talk about the leverage point between brick-and-mortar and online and also here your specialization as you engage in getting people to shop however they want?

Peter Sachse

Yeah. Well, obviously, we believe very strongly that the two channels complement each other. They are really not. We don’t think of them as separate anymore. It’s just one guy at Macy’s and anyway the customer wants to shop anytime. She wants to shop anywhere. She wants to shop. We have to make sure that we facilitate that.

As you know, we’ve already have all of our stores as fulfillment centers. So, every one of the 655 moving stores are now fulfillment centers. So we can ship from all the direct-to-consumer warehouse, as well as all the stores.

We are in the process of rolling out, buy online, pick up in store and have received just tremendous results. It is sitting today in about 45 of our stores and the number of orders and requests to that service has been far surpassed our expectations.

And we are very, very excited about that in the stores and we talk about this a lot that the most precious thing that we can ever get in the store is a visit. So we don’t care if that visit is something that they’ve already bought and they are just there to pick it up or something that they already bought and they want to return it.

So we want to make each and every encounter with the customer, clearly magical, something that they won't forget, so that they do come back. So the channel serve each other, completely serve each other.

Oliver Chen - Citigroup Inc.

Inventory management and localization has also been a key theme and specialty of what you have been doing there? How much further do you have to go in terms of further refining, planning and allocation at the store level?

Karen Hoguet

Well, I think, the answer there is we have really just starter to view inventory across channels as one inventory. And so, I think, we are just at the beginning stages of hopefully improving inventory turnover over the next couple of years.

I think for those of who you have been following the company for a while, we have talked about this, it is something that should come from the ability of shipping merchandize so easily to the customer and but it is hard to do and in the meantime, we don't want to disappoint customers. So that’s still really almost all in front of us.

Oliver Chen - Citigroup Inc.

And also regarding your customer and the demographic, you’ve done a great job as the concepts on the millennial focus? Could you speak to the efforts there and how you see the evolution of demographic in staying relevant on a multi-year basis?

Peter Sachse

Well, as you know the millennial generation is now the larger generation out there and we are getting attraction in most of our millennial businesses. I am quiet pleased with where that is going. But probably the more important point is that millennial generation, that large population is going to grow older and we are particularly suited when they do get into their 30s and 40s and ready for them at that time.

And the important part is to get them acquainted with Macy's, interested with Macy's, quit frankly and love with Macy's in their 20s and it’s been wealthy with us for the balance of their live.

We have a particular emphasis right now on bridal and working very, very hard to make the bridal experience even better, as you know the average age of a bride is around 27 years old. So if we get there than we got her in for all of her needs in her 30s and 40s.

Karen Hoguet

I am just going to say plus so often when people say bridal they think of tabletop and home category. We are taking a much more holistic view of that business from the ring shopping to the bridesmaids’ dresses, to jewelry for the occasion, other dresses and apparel needed during the wedding in a pre-period, as well as accessories plus apparel for the men, for the groomsmen. So it’s much border and more comprehensive.

Peter Sachse

We are actually finding an interesting thing with the millennial, we sell a lot of suit separate, right, you can buy the pent and the coat separately and we are finding many, many bridal parties buying black suit separate instead of renting a tuxedo, it is actually less expensive to buy a suit separate these days and by the way, you get to keep it versus renting tuxedo. So as Karen said, we were finding different avenues into that bridal party in that event.

Karen Hoguet

I think the everything you saw, we are just thinking on the millennial, one of that we have been particularly successful is active, which is important obviously for millennial male and female, but also for older people as well. And I think each time you go out to the stores, it’s get a little bit bigger, a little bit better and we are making enormous progress there.

Peter Sachse

Yeah. The business has been quite good. We are actually has an executive committee headed towards Florida last week for one of our executive committee visits. We visit each and every one of the regions every signal year and we are going to make a side trip to Dadeland where we have built one of the first Nike training club and it is hard to describe, but if you have been in the newest Nike prototype stores we have actually built that in four of our stores, Dadeland being one of them in Miami, so we are really excited to go and see that.

Oliver Chen - Citigroup Inc.

As part of unique store also is your amazing relationship with your suppliers. Could you speak to us how you think about your brand portfolio and internal brand development versus external and also licensing strategy?

Peter Sachse

Our brand partners are incredible important to us as well as our private brand. And we used the two portfolios to complement each other. When there isn’t something that our domestic resources can accomplish for it. We put it on our private brand group and we need you to fill this white space. We’re constantly looking for white space. The customer needs that isn’t being satisfied somewhere either in the marketplace or through our private brand.

We also challenge our marketplace brands. Our domestic vendors are very hard on how to make it exclusivity for us. So be it Polo, be it Hilfiger, be it -- nor it could be any of those people. We’re constantly trying to get a certain percent, 10%, 15%, 20% of that brand exclusively made for Macy’s. It can only be found at Macy’s. They complement each other.

Oliver Chen - Citigroup Inc.

Thank you. And Karen, what are your thoughts? On the last call, you did mention an opportunity for realization of pent-up demand on near-term basis. Also you called out some weather sensitivity. Could you speak about the trends you were seeing in terms of different regional strengthened. Why the pent-up demand has a big opportunity?

Karen Hoguet

Sure. Well I can, obviously, only talk about business through the time of the earnings call. So it is a little stale now. But in terms of that point, if you look at our first quarter, you need to remember first that we shifted the timing of friends and family. So we had always planned the first quarter to be well below the second quarter. And obviously that would be different when you look at our business relative to competitors that didn’t have that promotional shift.

The second factor what we talked about was the fact we had a terrific first quarter last year and a less good, let’s just say second quarter. So we also know we were up against the numbers in the first quarter, which also contributed to how we planned first quarter versus second quarter.

Then there is a Macy specific factor. Then you get into the whole weather issue which impacted the whole northern part of the country. Any market that had an S in front of it had a much better first quarter than second quarter. I’m sorry first quarter than the North, not than the second quarter. And so we felt that once the weather got warmer, throughout the north, business would pick up and in fact on the earnings call, we talked about the fact that had in fact happened. So we do believe people were waiting to buy summer apparels, warm weather apparel and as the weather got better so did business.

Oliver Chen - Citigroup Inc.

And how is your feeling about your state of the inventory in terms of freshness. It sounded like you are quite well positioned?

Karen Hoguet

We are, I mean, the inventory numbers sounded a little high to people because it was obviously higher than the first quarter sales. Remember again, we had expected the second quarter to be better than the first quarter. But it was a little higher than we had expected because of the weak sales in the first quarter. But again we’re not worried about an inventory aging because most of the goods were fresh still and had just come in to support some of the customer favorite programs which I’ll ask Peter to talk about in a second as well as what we call summer essentials.

So a lot of the inventory was strategic and fine now that we’re into the second quarter and warm weather. I think it’s -- well, talk about the customer favorites group.

Peter Sachse

Well, we came out this year with 200 items. You could call these key items, big items whatever you want but the 200 items that are across all stores that we put up particular visual package again. And these 200 items we want to represent a little bit over or about 10% of our business. Thus far they have been spectacular. They have been very, very successful. They have been just sorted in every single store. The stores actually walk every single week all 200 items where they position what was my sell-through, how does my sell-through compares to the sell through of by district, by region and the company.

So there is a very big focus on these 200 items and they are working very, very well. I’m very pleased with the initial development. What we also saw, to Karen’s point was those 200 items performed incredibly well in the first quarter in our southern region. So we knew we had the right goods. We just needed the sun to shine at some point in Minneapolis, Chicago, Detroit, Cincinnati, New York, Boston et cetera and the sun did come up.

Oliver Chen - Citigroup Inc.

Moving onto -- well also regarding the comp store sales and your forecast of two to three -- on a long-term basis and the near-term basis, did you feel like that’s going to be convergent and traffic LED versus AUR. How should we think about…

Karen Hoguet

You know it’s all three.

Oliver Chen - Citigroup Inc.

Yeah.

Karen Hoguet

I mean, again it’s hard to predict AUR over the course of the quarter. But over the next couple of years, we hope it’s all three.

Oliver Chen - Citigroup Inc.

Also you’ve done an amazing job with the promotional management of this environment in terms of having great marketing programs and thinking about pricing strategies proactively as well as flexing different needs in the marketplace depending on the environment. Could you speak about that attribute of your organization?

Karen Hoguet

I mean that’s good talent of Macy and merchants and the marketers and the store people do a fabulous job of planning promotional event, managing the inventory, managing the markdowns that comes from that and that really is the quality of the team all the way through up from the top down. And I have said forever for that planned promotions, you can make money with. The ones that are challenging are when you suddenly have good business and you throw something at it. That’s how we tend not to do that.

So lot of people last year said, for example, after the week of second quarter when we had the significant improvement in the third quarter. If you knew what to fix, why don’t you do it in the second quarter. And so if we had done it then, it wouldn’t have been planned out properly and it would have cost us lot of money. So we are very methodical with what we do.

Peter Sachse

I think it’s incredibly well said. When we plan things, we can execute them well. And we always are reacting. So please don’t misunderstand what Karen might have said. We are always reacting into the current environment. But in terms of long-term planned promotions, you need to set the strategy, four or five, six months in advance. Let’s say entire organization, we have a very large group of people, we need to communicate with from the stores to the buyers to the planners. So everybody knows what the intent of that is and then they go out and execute it. That’s been the margin parameters that we have given.

Karen Hoguet

And to Peter’s point, there is always tweaking as we go. I guess, you’ve heard we’ve talk about our [rafting] (ph) process, a rolling, operating forecast which is critical to allowing us to schedule people in the stores properly based on where business is by stores, by departments and also on the merchandise receipt by vendor, by department, by item to react constantly.

Oliver Chen - Citigroup Inc.

How do you see the evolution of the consumer at large proceedings as we get to the heightened promotional environment within the mall, relatively fix mounted and kind of the dynamic between apparel and accessories. Just curious about all these different thoughts and how people may continue to shop, the rise of our price as well where you can get the national brand at markdown prices?

Karen Hoguet

I mean, at least, my view of the customer is value oriented and by the way always is, always helps and always is. So we don’t see a lot of change. There are a lot of prices to shop and this business has been competitive for my 30 years, Peter’s 30 years here. So we’re sort of used to that. I’m sure there is new format and new things but we just always have to keep the customers at center of all decisions whether it’d be assortments, store issues, finance issues, I mean, all of that and just keeping better than the competition. And I think we’ll continue to do fine.

Oliver Chen - Citigroup Inc.

Within your assortments, you’ve called out some strong areas in handbags and accessories that performs very well. Do you see the assortment -- are you always changing kind of a composition in these assortments? Where do you see that going overtime?

Karen Hoguet

What do you mean by the composition?

Oliver Chen - Citigroup Inc.

The mix of products.

Karen Hoguet

We’re constantly reacting to what the customers are buying. So we’re tweaking floor space and making changes constantly as you would expect. I mean, that’s how you do better in our kind of business.

Peter Sachse

We have many, many tools on the stores that evaluate balanced per square foot down to the department vendor level at some point. So the expansion and contraction of space happens every single day. We planned very big expansions and contractions happen seasonally and we helped fund those. So be it a mattress business that we want to go from 33 mattresses to 48 on the floors, to a handbag floors that we want to make 500 square feet bigger, all of that gets planned out in advanced and we do that.

Karen Hoguet

Yeah. And one of things when Peter came into this job, so we could have change there a lot of the thinking around capital spending in the stores. And Peter’s view was, when you change space around, you are more likely to get incremental sales. So he spoke as much more on lots of smaller projects as opposed to the big Q3 models that we would have done kind of 15 years ago. And it’s been extremely successful spreading the money. We were out last week in Menlo Park and we put in a furniture department that is spectacular but not a lot of money, but it is around the rest of the stores to be a lot more productive, have a great furniture offering there.

Peter Sachse

It’s a great example actually of what we do in allocating space. I was there exactly one year ago and one of the tools that we have gives us productivity by floor, so that first level to second level to third level and they are clear that the first level wasn’t earning its keep and nobody ever thinks they can takeaway 20,000 square feet but that’s what we did.

We made everything a little bit smaller and more productive and we have a 20,000 square feet of furniture and mattresses into the store and while we did that, we’ve re-layered different things in the store, got all of ready-to-wear together. The customers are reacting in very, very positively at this point. So it is those types of things like Karen said versus the big $10 million or $20 million remodels top to bottom, so we are having the exception that we focus on time and money.

Oliver Chen - Citigroup Inc.

Karen, on the capital spending side and the cash flow profile, could you just remind us about your strategy for repurchasing and dividend?

Karen Hoguet

I mean, the first use of our cash is always going to be strategic and as you know, we are spending the share about a $1 billion in CapEx, which I think is about what it will be in the next couple of years to the best of my ability to put up, which is a little big higher than it has been frankly due to the increase in spending and technology. So the store capital has been relatively flattish and we are spending more than we invest in digital and also store technology. So it’s not bricks-and-mortar in the store of it. And when I’m done, I’m going to see there is a talk about the big-ticket tablet we saw last week in Menlo Park which is one of the examples. So when you have 650 stores there, you multiply only a small technology investment, it becomes a bigger number. So we are funding that. So that will continue to be the proceeds of cash.

However, given the cash that the company has generated as you know, we still have lots of cash leftover. You saw the increase in the dividends, so we will continue to pay a competitive dividend and then what’s left essentially will go to the buyback and that’s how we have been managing the business.

Peter Sachse

You talked about how the consumer is changing and how they want to shop. One of the things that we are trying to introduce into the stores is a lot more mobile technology. So literally, we become tour guide to the customer instead of travel agents. We all know the old travel agent, right. They walk-in to the office, they sat behind a desk and you say, I would like to get to Miami, they would type in their thing and they would sent you to Miami. The tour guys is out in the city that you are going around and what we are being able to do is many, many examples in the business but what Karen was referencing within our furniture business is we have created a piece of software that in essence allows you to do everything on a tablet.

So as you are sitting there on that sofa, we can bring up the dimensions of your room -- living room that you want to put that in and put that sofa right against the table and you could view because we have the dimensions with the sofa. We have all of the attributes from macys.com. So we know the sofa is 72 inches long, 48 inches wide, 36 inches deep. We put that against the wall. The customer says, my wall is eight feet, okay. Boom, this is what my sofa is going to look like.

We can then show here as she is sitting on the sofa or he, all of the different fabric that comes in. Before that, it was about three trips to a back room with a big spool of fabric and we go like this, you’ve all done this before, right. The technology allows you just to look at it, eating in their living room, they are sitting on it, they like it, I like it in the top and firmly order right there for you.

Karen Hoguet

And schedule the delivery.

Peter Sachse

And we continue our delivery. And then we do, we will get to where that tablet will also be mobile checkout. It isn’t today. But everything that is on the tablet, it is sent immediately to the POS device and it also serves the customers walks up, swipe their card and with that so.

Oliver Chen - Citigroup Inc.

What’s the mobile fact of the traffic generation that you have been seeing from consumers and handhelds has been tremendous from the industry data we see? What do you think the next frontier as customers use their phone in terms of what technology you will be able to provide on that end?

Peter Sachse

I think it’s unlimited. The interesting part, Oliver, though is when you walk-in to stores now and I’m sure you have all experienced this. There are more and more customers standing in front of the product with the product detailed page up on their mobile device from macys.com. So, they are getting target knowledge through their mobile device, often times before they get there but we will be out there as well. One of the things that we are working hard on in this stores is how do we make our sales associates to prepare quite frankly and as knowledgeable as the customer.

Never in the history of retail has the customer have more knowledge at their finger tip than the sales associates. This is not something that is unique to Macy’s, if any particular retailer because you can get any information you want, if a husband is driving I don’t suggest they would need to drive it on the way to the mall. I want to know how this system works. So there is the customers using their mobile devices in new and different ways. We need to make sure that we are ready for that and as we equipped our stores organization to have as much installation in phases.

There will be a time, I really believe this that the entire store will be mobile. So there is still a need to be a cash register because at some point, we are going to need to take cash. We think there is little of it today, so we are going to check. We’d take very little of that. There will be very few and Karen and I are thinking about it as we speak and all we’ll do is equip the sales associates with a handheld and a meg business, and we will able to be completely mobile not attach.

Karen Hoguet

Or maybe even get to start checkouts up to around device and that’s sort of the next step of Peter’s vision.

Peter Sachse

Right.

Karen Hoguet

But so it will be coupons and mobile devices. Everything will be eventually on a mobile device.

Peter Sachse

So when you talk about -- when Karen talked about the investment, it’s not just about macys.com and how we are supporting them, it’s all of these ideas. How do you support the stores in this mobile world, in this tech knowledgeable world that is the point?

Karen Hoguet

So for example, office format, when you walk into a store, I want to see blank where do you go, particularly true in Union Square. And also you get tough with offices, a lot of things going on that we are really excited about.

Oliver Chen - Citigroup Inc.

My last question for you, I will open up to the audience for questions. What about on the online front that you think need and where is the frontier with shipping and how do you feel about the speed about where it could go versus where it can get to in? Customers care a lot of about these factors.

Karen Hoguet

It’s also -- downtown customers care a great deal today. However, there is no question that Sunday delivery is going to become a norm, not because they necessarily need what we are shipping Sunday. But that’s going to be what everybody else is providing and so we need to do it as well overlook old school. So one of the reasons we got started on buy online, pick up in store is really less about buy online, pick up in store, but more getting the technology capabilities so that we could do things over delivery, because a couple of years ago we might know that we had that shirt and that size somewhere within the system, so we didn’t necessarily know we had it in that store.

So today we have that capability which then would enable us to do same day delivery. And at that point, our fleet of stores becomes the huge competitive advantage relative to peer place who just have warehouses, because we can reach, I think it’s something like 75% or 80% of our customers next day from warehouses but not same day. The same day requires our stores. And so, again, we will see how it evolves. We’re beginning to test in this area. Things move fast, I don’t know how fast it will be. But again it was a buy online pickup in store capability that we now have that will enable us to do some day delivery pretty quickly.

Peter Sachse

And even the next day the unique advantage we have against the pure-plays is we’re shipping from 10 miles away from the customer. They might still be able to get us there next day, but they are 300 miles, right. So the efficiency of being able to pick real-time which is really what buy online pickup in stores. You got order comes in, you got to pick it, because you got to get it to a truck, you got to get it to a stock room or something that has enabled next day and ultimately same day.

Oliver, when you think about the history of the Internet, it went something like this. When people first bought online, they hoped it showed up and they were excited, it came 7 days later, right. Then this little guy by the name of Amazon showed up and he said no, no, no we are going to get it to you in 2, 3, 4 days, then we had to copy that, the new customer and they were willing to pay for that. Then, they said well this would be a lot better, that it’s free and it was in 2, 3, 4 days. Then everybody went to free. The Karen’s point there is not doubt that it’s going to get to same day or next day. That is what we have to get to, not because they need it, it will just be a thing that something you will have to do.

Oliver Chen - Citigroup Inc.

Thank you. If you have any questions, please free to jump in.

Question-and-Answer Session

Unidentified Analyst

Hi, Karen. Hi, Peter. I just had a question regarding the proliferation of technology and transparency regarding pricing versus your competitors online versus offline. You have apps like ShopSavvy where you can just scan a barcode and see the exact item that you have in store versus the same item online and how that’s going to impact your pricing and margins going forward? Thank you.

Karen Hoguet

It’s a very good question and Peter’s just whispered you get to answer that one. It is a good question. It’s one we’ll discuss in a great deal as you might expect. So far, we think our customer likes the fact that dotcom and stores have the same pricing. And fortunately, again, back to the exclusivity issue, most of what we carry can’t be shopped that way today, because you can only find it at Macy’s or in department stores, so it’s less of an issue. In some of the home categories, it’s probably more of an issue, but it’s clearly something we are talking about. We don’t know the right answer yet to be honest. And so far, the business continues to grow rapidly, both channels. So we are spending a lot of time thinking about it because I think it’s there.

Peter Sachse

If there is ever a discrepancy, the stores know to honor the lower price. So there are very, very few at least I hear very, very few customer complaints. And if there is a concern on the customer’s part, we will honor the lower price. So I don’t think a customer would need to be aware of it and so they ask. Normally, it’s not something that we put up in lights or anything like that, but if they become aware that there is a discrepancy in the price between macys.com and the stores, we and the stores are always there to honor the lower price.

Karen Hoguet

Yes. And also somebody often asked about dotcom and store pricing, the initial prices we always start with the same. Most of the time the promotional prices are the same, although there are some differences in, for example, Monday’s online or big promotional day not in the stores. So sometimes on a Monday, you will see a cheaper price online than in the store, but we tried to keep it pretty close and sometimes we don’t, it’s accident and not purposeful.

On clearance however, we don’t have different pricing, just like we do in different stores sometime, because you wanted to clear based on the sell-through, and we don’t get complaints about that. Where we get complaints are the everyday prices or the promotional prices. The clearance item, people do understand that. So we are also spending a lot of time also between channels making sure they are comparable.

Unidentified Analyst

Yes, back here. Peter, Karen, I don’t ask you a broader question in terms of growth strategy. You had 800 odd Macy’s and you are not building lot more visual shopping centers. You have a wonderful franchise in Bloomingdale serving the upper market segments. Have you thought about how you’re going to address the lower two income quintiles, whether there is an opportunity for bringing magic to those lower two income quintiles to the new format?

Karen Hoguet

You know Craig we talk about all kinds of growth ideas. Right now, we do have our handful doing what we are doing with the omni-channel and we really believe the digital technology and mobile will be a big source of growth for us. And obviously us and it’s true of Macy’s and at Bloomingdale’s and now that we are ready to start the expanding the Bloomingdale’s outlets, that’s another growth vehicle. So we do talk about growth a lot in terms of what will the next chapter be, but at this point we are really focused on maximizing what we have.

Unidentified Analyst

Building on that, what your thoughts on international as opportunity?

Karen Hoguet

Well, as you know, we have a Bloomingdale store in Dubai that we’ve done with the partner. It’s their but our brand name which by the way I think is worth a lot more than their capital, but we put that aside. And it’s been a spectacular relationship. The store does extremely well, and it’s been very good for Bloomingdale’s here in the U.S., both in terms of bringing international travelers that may not have had Bloomingdale’s at the top of their list, they now are shopping more in the U.S. Also there are some brands that wouldn’t do business with Bloomingdale’s in the U.S., but they love the partnership in Dubai and now selling to us here.

So that’s been a homerun and we may consider other deals like that with the partner for Bloomingdale’s, maybe even for Macy’s, but I think you’ve heard us all say that for Macy’s, while we may do a deal like that or two, we’ve always looked at where are there big populations and big growth, where we could do a more fulsome Macy’s strategy as opposed to a one-off kind of the strategy. We will say at this point it’s the same answer for Craig, we are really focused on what we are doing, but we are looking at all avenues for continuing the growth, and frankly you know maximizing this franchise we have that we know to be strong, Macy’s and Bloomingdale.

Unidentified Analyst

Peter, Karen, just a question on how you think Macy’s can compete with the proliferation of slash deal website like Zulily or Rue La La?

Karen Hoguet

I will let -- honestly that has not been a huge issue for us and we’ve tested them on Bloomingdale’s as well, but sort of things we worry about, I wouldn’t put high on the list.

Unidentified Analyst

Peter, you would.

Peter Sachse

So I think that’s correct. They obviously came about the after the crisis of ’08 and ’09, and quite frankly or probably peaked somewhat and getting the merchandise is a lot harder for all of them. It is not something that we spend a lot of time on. We haven’t felt the impact.

Unidentified Analyst

Thank you. It’s [Daniel Fernedia] (ph). I wonder a bit about your marketing strategy and how that has changed with growing on the online business. I think a lot of your more online competitors are spending huge amounts on Google search and that kind, and then you have the background in the floor base. So now when focusing more online, is the strategy changing, is the cost of marketing changing?

Peter Sachse

We were one of the pioneers, quite frankly, at least in the bricks and motor part of it to spend a lot of our budget on digital. We continue to shift our budget towards digital. I think we are one of the better partners of Google and have been with Google. Actually, I think the first ad we ever placed on Google was in 2007, when most people didn’t even know that Google existed yet. So the marketing department is incredibly forward thinking. From every aspect of digital, every aspect of social marketing, they are entrenched and continually shift their budget towards that.

We know that we need to continue to drive more and more traffic to macys.com, not because of just the macys.com, somewhere around 75% of our customers before they ever enter the store visited macys.com. So we want to drive traffic there. It is the portal to the brand and we spent a lot of time and energy and money on getting that digital portion of the marketing strategy correct.

Unidentified Analyst

Thank you. What’s your general take on the health of the consumer and your thoughts on how you feel?

Karen Hoguet

I think as we said on the call that we think the consumer is strong enough to achieve the guidance that we had given. We didn’t expect to be same. The consumer spending was really strong on our kinds of goods. So I think we would still say the same thing, not as strong as you would like but strong enough that we should be able to achieve our expectations for the year.

Unidentified Analyst

And about your earlier comments, Karen, on looking at different growth avenues, would you also consider M&A or organic?

Karen Hoguet

Sure. No, no, no, I mean, we look at everything as you would expect. So, no, of course, we would look at M&A as well.

Oliver Chen - Citigroup

Another question we had from investors was about different cost inflation issues -- potential issues whether it be labor or supply or other factors. Is there anything in the horizon that you would highlight different pressures on that front?

Karen Hoguet

I think you heard us say the biggest pressure right now is healthcare and as you recall, we made changes in our retirement benefits including freezing the pension plan to help us cover what we anticipate to be increasing medical cost. So that’s the biggest issue right now.

Oliver Chen - Citigroup Inc.

Peter, if I can just come back to the comment you made earlier about the 200 items that represent of the 10% of Macy’s sales. For those of us, who aren’t familiar with the store, can you just gives us an example of some of those items as seems like few items for a large percentage of the revenue, just curious?

Peter Sachse

While there is no doubt that way back when I started in retail, one of the first things I would ever talk was the 80/20 rule, right. 20% of your SKU produce 80% of your volume. And what you always did is you end up with 20% and left with 80% of the SKU. So by focusing in on these 200 things, owing them in depth, we made a conscious effort.

And then displaying them correctly, monitoring them, setting up a system what we’ve reported on them and monitor on them, we bought them in debt. And there are so many examples but our Karen Scott [Pendleton] (ph) is one of us. And we bought hundreds of thousands of that. A Polo shirt in the men’s department, one of the juicers in housewares is another example.

But more importantly, if you’re in our stores, look for the signs. On the customer favorite sign, we also give a QR code on everyone of them. So you talk about technology Oliver. You’re able to go up to that sign, just scan the QR code and get a much richer description of what that item does, its benefits, all the uses for that item and we have watched customers actually do that as well.

Karen Hoguet

And then Peter mentioned Karen Scott, which is a private brand but many of them are a regular national brand as well. So I don’t want to leave you with the impression it is all private brands.

Peter Sachse

We’ve got customers favorites in Polo. We’ve got customer favorites in Hilfiger. We got Nautica, we’ve got them throughout. And like anything else in a big company, the good news about this because we will not go above 200, is now the buyers are buying for it. So they got to say, I need a customer favorite because look what I get, I get a sign, I get this attention, the store is walking every week, all the rest of that. So the in -- competition from within our company is very, very good as well and healthy.

Karen Hoguet

The other thing is we’re using the word customer favorite but we truly are picking items that have been in this store that have been customer favorite. Plus I believe they’re looking at the online reviews, again trying to really have customer favorites, not manufacturing, what we think should be. And I think that’s part of the reason it’s been successful is that the trace of these items was based in research and fact as opposed to just collecting them and helping.

Peter Sachse

Right.

Oliver Chen - Citigroup Inc.

On the brand front, are you -- the threshold of national brands, do you see the mix thing about the same? It is a very attractive level.

Karen Hoguet

The private brands are little over 20%. My guess is they could go up a little bit and just because we see some wide space, for example, we’re launching a major brand in the spring, same with the Latino customer. And I will let Peter talk about it in a minute with Thalia but that should be spectacular. And you may see some of that but I don’t see dramatic change in the total mix.

Peter Sachse

We were very excited about the Thalia brand. And as Karen said, we’re launching in spring ’15. It would be one of the largest launches we’ve ever had across several different categories. And, again, the amount of attention and detail on the research that we went to build this brand correctly speaks to the strength again of Macy. We spent days out of the country in different cities, researching what the customer -- we had fit model after fit model after fit model to make sure we got the fit correct. And we think, we’ve got something pretty important here. It won’t be all successful to day one, no launch ever is, but we’re committed to our Latina customer and we think, we’ve got something pretty cool in the new brand.

Oliver Chen - Citigroup

Karen, Peter and Matt, and the Garden State Plaza team, thank you for being our keynote. It has been unforgettable and customer focused and we are excited about what the year holds. Thank you again.

Karen Hoguet

Thanks.

Peter Sachse

Thank you.

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