Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Karen Hoguet - Chief Financial Officer

Analysts

Bernard Sosnick - Gilford Securities Inc.

Dana Telsey - Telsey Advisory Group

Michelle Clark - Morgan Stanley

Robert Drbul - Barclays Capital

Robert Wilson

Lizabeth Dunn - FBR Capital Markets & Co.

Adrianne Shapira - Goldman Sachs Group Inc.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

Todd Duvick - Bank of America Corporation

Emily Shanks - Lehman Brothers

Jeffery Stein - Soleil Securities Group, Inc.

Wayne Hood - BMO Capital Markets U.S.

Paul Swinand - Stephens Inc.

Deborah Weinswig - Citigroup Inc

Michael Shrekgast

David Glick - Buckingham Research Group, Inc.

Lorraine Hutchinson - BofA Merrill Lynch

Macy's (M) Q1 2011 Earnings Call May 11, 2011 10:30 AM ET

Operator

Good morning, and welcome to the Macy's, Inc. First Quarter Earnings Release Conference Call. Today's call is being recorded. I would now like turn the conference over to your host, Ms. Karen Hoguet. Please go ahead.

Karen Hoguet

Thank you. Good morning, I'm 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 and Form 10-Q.

We feel great about our performance in the first quarter. Our sales growth continued strong, producing a 5.4% comp store sales increase on top of last year's 5.5% increase. As we have said repeatedly, the momentum from our restructuring and the implementation of My Macy's is building and bodes very well for our future. And the profitability of the business increased dramatically in the quarter, with earnings per share more than tripling.

We reported a earnings per share on a diluted basis of $0.30 versus last year's $0.09 when we exclude the expense related to the early extinguishment of debt. And with the continued confidence in our operating results and our balance sheet now in a stronger position, we've doubled the size of our annual dividend from $0.20 a share to $0.40. This is an important step in returning more value directly to our shareholders.

Let's first talk a bit about the quarter, and then I will discuss the outlook for the remainder of the year. Sales in the first quarter were $5,889,000,000, up 5.7% over last year. While ahead of our expectations across the country, our Southern regions, the Southeast, the Southwest and South Central, did best given the more favorable weather in that part of the country, and the Upper Midwest also had a strong quarter. This should bode well for the second quarter sales in the North as the weather warms up.

Bloomingdale's had another terrific quarter and continues to do very well versus their peer group. Sales on the Internet were also very strong in the quarter with a 38% increase. We are very happy with how our army omnichannel strategy is evolving at both Macy’s and Bloomingdale's. We believe both the stores and the Internet sales are benefiting from these efforts and investments.

In the first quarter, sales of jewelry and watches, cosmetics, Men's and home were very strong, as were our private and exclusive brands, led by I.N.C. The weaker businesses included Women's traditional and casual apparel, Women's suits and intimate apparel.

In the quarter, average unit retail was up approximately 1%. Our inventory continues to be in great shape, both in terms of quantity and quality. At the end of April, comp store inventory was up 2.8%, well below our expectation for comp sales in the second quarter. And even though we are controlling our inventory, we are making investments in new businesses like outdoor furniture, expanding successful businesses such as Impulse Beauty and designer fashion watches, as well as funding incremental merchandise receipts to support the fast-growing businesses.

Gross margin in the quarter was 39.1%. While still 30 basis points below last year, it is better than we had expected. As you recall, the key reason for the decline versus last year relates to the growth of Search and Send and overall free shipping on macys.com.

SG&A in the quarter was $1,973,000,000 or 33.5% of sales, which is down 1% in dollars and 230 basis points as a rate versus last year. This is much better than we had expected. Part of this favorability does relate to timing, and therefore, will come back in future quarters but most of the good news is permanent.

The biggest upside surprise came from credit. The profitability of our Credit business improved by $25 million versus last year in the quarter, which was significantly better than we had expected. The portfolio experienced a big improvement in bad debt. And in addition, the penetration of our proprietary credit card was 46.7%, which is flat with last year and better than we had expected.

Also in the quarter, stock-based compensation expense was lower than expected and was $16 million this year versus $29 million last year. Depreciation and amortization was $19 million below last year as expected, and we benefited in the quarter from the $12 million gain from the sale of our shares in The Knot.

Operating income in the quarter was $330 million, $127 million or 63% higher than last year, and 200 basis points higher as a percent of sales. Interest expense was $116 million in the quarter, which is $19 million below last year, excluding the cost associated with the debt repurchase. This is obviously due to our reduction in debt over the last year.

Tax expense was $83 million, bringing net income to $131 million in the quarter compared to $23 million last year. Average diluted share count in the quarter was 430 million shares, and as I said earlier, earnings per share was $0.30 in the quarter as compared to $0.05 per share last year, or $0.09 per share excluding the expense associated with the early retirement of debt.

Cash flow was also very strong in the quarter. Cash provided by operating activities was $67 million versus the use last year of $149 million. Net cash used by investing activities was a $64 million, $20 million higher than last year due to the increase in our capital expenditure budget this year. So cash provided by operating activities, net of investing activities, was $196 million higher than last year.

During the quarter, we've paid down $335 million of debt at maturity and contributed $225 million to the pension plan. We believe this puts our balance sheet in very good shape such that we are able to begin returning cash to the shareholders while still working toward our objective of becoming investment grade at Moody's and at S&P.

Given this crossroad, we thought it would be the right time to discuss the key credit metrics that we are now tracking and our targets for these metrics. As you know, S&P, Moody's and Fitch calculate credit ratios using different definitions. And we've attempted to combine the best of all three in setting our own definitions.

The details of these calculations are all on our website under Financial Information. But essentially, we're using reported debt, EBITDA and interest expense and making adjustments for leases and for any underfunding of our post-retirement plans.

So we are tracking two key ratios: one, leverage for the adjusted debt to EBITDA; and the other, coverage, adjusted EBITDA to interest. So for 2010, our adjusted debt to EBITDA ratio was 3.0. And on a rolling 4-quarters basis through the first quarter of 2011, this ratio improved to 2.8. Our current target for this ratio is 2.4:2.7. For 2010, our adjusted EBITDA to interest was 5.6. And on a rolling 4-quarters basis through the first quarter of 2011, this ratio improved to 6.0. Our current target is 6.4:6.6.

We expect to achieve or come very close to achieving these targets by the end of 2011. We believe that these targets are consistent with what would be necessary to achieve investment grade, although as you know, there are many other quantitative as well as qualitative factors that go into the rating decisions.

The first quarter was a great one, and we are so pleased that the momentum continues to build. Our organization is completely focused on keeping the sales growth trend going. We are all focusing on better serving our customers, both in-store and online, with great, locally tailored assortments, terrific value and MAGIC Selling.

As you saw in the press release, we increased our guidance for comp store sales growth for the remainder of the year to approximately 4%, which would translate to approximately 4.3% for the full year as compared to our original guidance of 3%.

For the second quarter, we are expecting comp store sales growth of around that 4%. Although, I should add that we expect the highest sales growth in the quarter in the month of May, the next highest in the month of June and the lowest in July, given prior year's performance. For earnings per share, we're guiding to $2.40 to $2.45 or up $0.15 from the original guidance, and CapEx is still budgeted at $800 million.

We are off to another strong start this year, and we have every expectation it will continue. There has been a lot of speculation about how the consumer will react to higher gas prices, price inflation, stagnant housing prices and a myriad of other macroeconomic factors. No one, of course, knows how this will all play out, but we do feel great about our company's ability to continue to outperform the competition no matter the environment.

We have a tremendous amount of ammunition in place. And as I have said repeatedly, the My Macy's culture and structure combined with the omnichannel strategy are making an enormous difference. We couldn't be happier with the progress we've made, and we are all feeling very positive about the potential in front of us.

And with that, I will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Deborah Weinswig with Citi.

Deborah Weinswig - Citigroup Inc

So your sales obviously significantly beat your expectations in the first quarter. You talked about omnichannel and a lot of other factors, but what do you think were the key drivers?

Karen Hoguet

I think it's all of the things we've talked about. It's not one particular factor. The assortments have been terrific. The MAGIC Selling is beginning to help, the localization of the assortments. Obviously, the Internet had a great quarter. I really do think it's a combination of all of the strategies we've been working on, and they are all working.

Deborah Weinswig - Citigroup Inc

You called out the performance of exclusive and private label, is that growing faster than your national brands? And then, can you also throw in there some of the discussion on the Designer Capsule?

Karen Hoguet

Yes. The private and exclusive brands are growing faster the national brands as they have in the last couple of years. It's doing very well across the board. And the capsules are doing well. Obviously, small but what they're doing is generating a lot of excitement and energy around the stores.

Deborah Weinswig - Citigroup Inc

Okay. And then I'll turn in one last question on Bloomingdale's, which is twofold. One, I believe at the analyst meeting last year, you talked about investing in the Bloomingdale's flagship in the city and I didn’t know if you could elaborate on that. And secondly, can you just talk about the performance of the outlets to date?

Karen Hoguet

Yes. On 59th Street, we have invested quite a bit of money over the last couple of years and continue to improve different parts of the store. We just approved the project for a couple of floors. I'll let you be surprised when you see it later this year. But that store has continued to perform well, and the investments we're making are paying off quite nicely. And then the outlets, we feel good about. It's obviously still early. We've got 4 open, 3 more coming this year, but we are feeling very good about that strategy.

Operator

We'll take our next question from Emily Shanks with Barclays Capital.

Emily Shanks - Lehman Brothers

I had just a couple of follow-ups around the investment grade goal. I was wondering if you could give us a little bit of an explanation around what the drivers are of that goal and what you think the operational benefits are of obtaining investment grade?

Karen Hoguet

You mean you're asking why we want to become investment grade?

Emily Shanks - Lehman Brothers

Correct.

Karen Hoguet

We believe it gives us the appropriate amount of financial flexibility that a company like ours should have. Obviously, it does save us some money in terms of financing costs but the bigger issue is the financial flexibility.

Emily Shanks - Lehman Brothers

And do you see yourself ever wanting to get to the point where you can issue VP?

Karen Hoguet

Well, that's obviously the goal. As you know, prior to the economic downturn, we had a BBB rating. That would be desired. But at this point, we're just aiming to get back to the BBB-minus range.

Operator

We'll take our next question from Liz Dunn with FBR Capital Markets.

Lizabeth Dunn - FBR Capital Markets & Co.

I guess 2 questions on product and then just one on expense. Is there -- do you have any examples of sort of early price increases and customer responses to that? And then the second product question is, are there opportunities to take some of your learnings with these capsules and exclusives into some of the areas of Women's that are underperforming?

Karen Hoguet

We would sure like to do that in terms of your second question. We are trying to learn and see what we can expand from that in terms of the other parts of the business, some more traditional parts. I'm not sure what the learning will be but we'll certainly try. And in terms of your first question, we have done some limited testing in terms of the price increases. In most of the areas where we've tested so far, the tests have gone okay and have gone well. I think there may be some resistance in some of the moderate home categories to price increases. But that's how we plan the business. But so far, I see no surprise.

Lizabeth Dunn - FBR Capital Markets & Co.

Great. And then on expense, why was stock compensation down year-over-year? And do you guidance for credit expense for the full year embedded in your SG&A guidance that you could share?

Karen Hoguet

The stock compensation expense, as you know, is non-cash and is dependent on what the stock price does. So last year, in the first quarter, the stock performed quite well. This year, it didn’t perform as well. So it's just strictly one of the things you can't plan. It depends on what happens with the stock price. In terms of credit, it will do better than what we had expected for the remainder of the year. But I, at this point, can't really give guidance. We're still just watching these trends very closely.

Operator

We'll take our next question from Paul Swinand with MorningStar.

Paul Swinand - Stephens Inc.

Thanks for taking my question. Sorry, I've got a little bit of a cold, but my first question is on CapEx. I know you're holding the $800 million, and I know depreciation has been coming down year-over-year. As things sort of normalize or are stable now, do you see that eventually picking up on a square footage basis? And then the second part to that question...

Karen Hoguet

You mean CapEx?

Paul Swinand - Stephens Inc.

Yes. And then, obviously, you're investing in technology and the Internet. Do you see that increasing and the leveraging, or how do you see that playing out?

Karen Hoguet

At this point, we don't expect much of an increase to the $800 million in terms of CapEx. Obviously, we look at it every year, and we're constantly evaluating new store growth opportunities. But at this point, the $800 million is the best guidance I can give you.

Paul Swinand - Stephens Inc.

So that's a good refresh rate ongoing for your existing store base?

Karen Hoguet

Correct. Correct, including the investment in technology. And so yes, I do expect that we will be forever investing in technology. What we're investing in will obviously change year-to-year, but that's a very important part of our strategy.

Paul Swinand - Stephens Inc.

But that should eventually leverage, is that fair? Or is...

Karen Hoguet

It should eventually, but it's growing so rapidly. I'm not sure.

Paul Swinand - Stephens Inc.

Okay. And then just a quick question on the training. I know you and I talked about it last quarter. I know your ongoing training is a program that you're going to invest in. But comparing to the quarter last year, in the first quarter, did you have a more one-time lump of training in SG&A last year?

Karen Hoguet

I don't think training should be viewed as lumps. The truth is it takes a long time and multiple refreshers for people to be trained properly. So I think there's a cumulative build, both the more formal training we're giving and also the experience on the floor trying to take that training and make it happen, which as you know, an important component of what we're doing is coaching. So I don't think it's, in your words, lumpy, and it's just going to continue to build.

Paul Swinand - Stephens Inc.

Got it. Got it, thank you for that. And then just to follow up on that. If someone were in stores in major metropolitan areas, what percentage of the employees are trained that we'd be running into? Is it pretty much everybody?

Karen Hoguet

That should be 100%.

Paul Swinand - Stephens Inc.

100%, okay. All right.

Operator

We'll take our next question from Bernard Sosnick with Gilford Securities.

Bernard Sosnick - Gilford Securities Inc.

You said that proprietary costs held at about 47% of sales, and you were encouraged by being flat. I'm wondering what factors are at play and particularly, the loyalty incentives that might be supporting your proprietary card program?

Karen Hoguet

Well, I think -- I mean there's nothing new other than in 3 markets in terms of the loyalty program, so I don't know that, that's really what's supporting it. I think our customers feel that there's value using our card and like having that connection with us. What we have been concerned about has been the opening of new accounts, given all of the legislation coming out of Washington. And so we remain concerned about that, and that's why we're so pleased with flat penetration.

Bernard Sosnick - Gilford Securities Inc.

In the last call, you gave us a little bit of a hint about the dunnhumby findings. You said that customers love coupons. What are some of the learnings that you might be getting out of that and things that we might expect to see from Macy’s?

Karen Hoguet

Well, I think what we're finding is that as we understand how individual customers shop and what's in their shopping bags, we're making better decisions about what to carry in the stores. So for example, if you find that your most loyal customers buy a brand that may in and of itself not be profitable, you wouldn't want to exit that brand from the store if it's driving the best customers into the store. So we're spending a lot of time looking at that. Similarly, we're looking to see what products or brands our best customers like. And in some cases, adding that to more stores knowing it will drive a more loyal customer.

Operator

We'll take our next question from Michelle Clark with Morgan Stanley.

Michelle Clark - Morgan Stanley

You had mentioned in your prepared remarks that some of the SG&A performance in the first quarter was due to timing. Can you just give us a little bit more color there, what amount shifts out, and then how does that plateau over the second through fourth quarter? And I know that for the full year, you had guided SG&A growth to 2% to 2.5% previously. Is that still the full year outlook?

Karen Hoguet

Yes. That's a hard question. Some of it we know to be timing where something was supposed to be spent. We know it was spent but will happen. The expense will actually happen in the second quarter. Others, I think many people just say it's timing internally when it may not be. So I can't really give you a specific number to be helpful then. Obviously, a lot of that, I would expect to come back in the second quarter. And it's hard to give you exact guidance, but I think that's probably around the range that I think it will be.

Michelle Clark - Morgan Stanley

But second half for the full year?

Karen Hoguet

Correct.

Michelle Clark - Morgan Stanley

Okay. And then if you pull out the impact on gross margin from Search and Send, would your gross margin rate in the first quarter have been up?

Karen Hoguet

It was flat.

Michelle Clark - Morgan Stanley

Okay, that's very helpful. And then any updated learnings on elasticity and ability to raise price points?

Karen Hoguet

I think so far, we feel as if, as we thought about how the customer is going to behave, we've mapped it out pretty well. So in some cases, small price increases will work fine in terms of the customers. In other cases, we've been much more careful and reduce units. And we think that's probably appropriate, too.

Michelle Clark - Morgan Stanley

Okay. And any update on your unit plans for the full year?

Karen Hoguet

It's hard to give you an answer because it's so different by category. That if I added it together, yes, units are up, but there are some categories where that's not the case.

Michelle Clark - Morgan Stanley

Okay, great. And then lastly, any updates on price optimization by market?

Karen Hoguet

Still working. We have some tests going that are going very well, and we're also working on the actual system that we will eventually roll out to the company, which will make it easier to do that. But that will not be rolled out until late next year. So it's really a 2013 benefit, I think, that you'll see in terms of the gross margin.

Michelle Clark - Morgan Stanley

Okay, terrific. That’s very helpful.

Operator

We'll take our next question from Dana Telsey with Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about the gross margin cadence as we move forward? Obviously, at Search and Send, it was flat. Can we see improvement as we go through? I think originally there was flat guidance on the gross margin?

Karen Hoguet

Yes. Dana, I don't know. It's one of the hardest questions to answer right now. There's so many good things happening that would lead you to believe the margins should go up. But given what's happening with cost inflation, I just don't think we can commit to it. So I think flattish for the year is still the right answer.

Dana Telsey - Telsey Advisory Group

Got it. And then on expenses, any other things on expenses besides top line driving those expenses lower? And do you still expect 2% to 2.5% growth or does that adjust?

Karen Hoguet

Yes. I mean that's the question Michelle just asked. It's very hard. I think that's probably still the right expectation for the year. Remember, as you think about it, first off, depreciation, we had said would be down by about $40 million for the year. So that increment will go down since we got so much of it in the first quarter. By the fourth quarter, depreciation is planned about flat with the year ago. The stock compensation expense, we hope, becomes not a positive, meaning we're hoping the stock price is doing well because that will be factored into the expense increases. And as you think about things like credit improvement, which you think in terms of dollars, as the expense base growth after the first quarter, as a percentage factor, less significant because the base expenses are higher as you go through the year.

Dana Telsey - Telsey Advisory Group

Got it. And on the big initiatives, My Macy's, MAGIC Selling. Are you further along in My Macy's and MAGIC Selling, and is that what's leading to deflect trifecta of comps doing so well that the initiatives are all taking hold throughout the largest store base as we're moving forward now?

Karen Hoguet

Yes. I mean I think the misunderstanding that a lot of people have is that My Macy's or MAGIC Selling is a one-time event. It's really an improvement in how we think about the customer and how we think about the business. It just keeps building in terms of the momentum. As I have mentioned for example, one of our best regions was the Upper Midwest, which is one of the original My Macy's areas. It's their third year. Just keeps getting better.

Operator

We'll take our next question with Todd Duvick with Bank of America Merrill Lynch.

Todd Duvick - Bank of America Corporation

Quick question for you, Karen, and first of all, thank you for the clarification on the credit metric target that you're looking at. And so my only question following that is, with respect to, when you do resume share buybacks either this year or next year, I would assume that you're going to be -- how quickly you're going to buy back shares is going to depend on managing to within those ratios, is that correct?

Karen Hoguet

That's correct.

Todd Duvick - Bank of America Corporation

Okay. That was my only question.

Operator

We'll take our next question from Adrianne Shapira with Goldman Sachs.

Adrianne Shapira - Goldman Sachs Group Inc.

Karen, just as we try and kind of get our arms around elasticity of demand, I'm just wondering on the AUR of 1%, if you maybe could dissect ticket versus units per transactions and maybe shed some light there?

Karen Hoguet

The AUR is averaging at retail on a unit.

Adrianne Shapira - Goldman Sachs Group Inc.

Okay. But in terms of -- give us -- right, but in terms of trying to help us understand what you're seeing so far in terms of units versus tickets...

Karen Hoguet

Well, 1% is what we're seeing in terms of ticket. I mean that's what the price has gone up on units.

Adrianne Shapira - Goldman Sachs Group Inc.

Right. And so that's what I'm saying terms of what are you seeing – that’s the ticket, but what are you seeing in units per transaction? Are units down...

Karen Hoguet

Well, you know that -- I mean the total comp was up 5 .4% and AUR was up 1%. There's more units in transactions happening. I can't split between the 2.

Adrianne Shapira - Goldman Sachs Group Inc.

Okay. Okay, and then traffic in terms of part of -- to get to that...

Karen Hoguet

Well, obviously, it's either units or transactions. I mean it's both. But what I'm saying is the traffic is good. And as I have said to investors, I think the concerns about the price inflation has been overstated, and it's clearly something that is making our lives challenging. And people are spending a lot of time focusing on it. We've a whole group of pricing analysts trying to understand it. But we don't -- I'm not as concerned as I think many of you are about that subject.

Adrianne Shapira - Goldman Sachs Group Inc.

Okay, great. And then just talking about the categories, it does that seem as if there perhaps could be an opportunity on Women's? Give us a sense of the traditional, the casual, the suits, what you're seeing there in terms of the weakness, maybe some initiatives. Or what's in place to perhaps drive an improvement in those significant categories that still seem to be lagging?

Karen Hoguet

That's a good question. Obviously, we're working very hard to try to figure out what we can do to improve the businesses. Typically, it relates to needing more newness. And so we're focusing on that in those categories. I would say that's probably the biggest area. It's just making sure that even though it's traditional, it doesn't mean it has to be the same as what they've seen in prior years.

Adrianne Shapira - Goldman Sachs Group Inc.

Okay. And then just on the capital allocation front. I mean we're obviously seeing you doubling the dividend and as you say, you seem on track to hit your targets to be consistent with investment grade by year end. Just marry what the appetite is in terms of dividends, buybacks as you say, the focus continues to be returning cash to shareholders. Give us a sense of prioritization. How should we think about the opportunity and the appetite going forward?

Karen Hoguet

Well, I don't think we have a set decision on how we're going to continue to give cash back to the shareholder. Our history would say that we've tended to pay a competitive dividend, and then use excess cash for buying back stock. But we're still reviewing the various options.

Operator

We'll take our next question from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson - BofA Merrill Lynch

Just wanted to clarify a comment that you made on inventory. I think you had said you're planning inventory units up. And given some of the cost increase commentary we've heard from the vendors, that makes it seem as though inventory would be up quite a bit in the back half. Can you just maybe talk to us a little bit about how you're thinking about plans there?

Karen Hoguet

Yes, I mean I think it will be up, but I don't it's going to be up more than what we're planning for sales. I mean we're still working on the details with the plans so I don't want to give a specific guidance there. But overall, we're still trying to improve our turnover. So I don't think you're going to see a number that would frighten you.

Operator

We'll take our next question from Rob Wilson with Tiburon Research.

Robert Wilson

Karen, I guess you didn't tell us whether the metrics for traffic in units per transaction, but would you say they were both higher?

Karen Hoguet

I don't have those metrics. So it's not that I didn't tell you, we don't track it specifically. But obviously, it's AUR was up 1% and comp was up over 5%. There's more units being sold and more transactions and traffic, presumably.

Robert Wilson

Okay, close enough. And the Search and Send functionality, that anniversary-s fully at the end of Q1?

Karen Hoguet

At middle of the second quarter.

Robert Wilson

Middle of the second quarter. And finally, is there any update on the loyalty program test that you've been undertaking?

Karen Hoguet

No. I would say so far they have been not -- the results have not been compelling enough that we're rolling it out. We're still watching and seeing. But so far, while we've gotten sales lift, not enough to pay for the program. But we're still tracking along and seeing if over time it builds.

Robert Wilson

Have you expanded the test any?

Karen Hoguet

We have not. Well, it's really in 4 markets now. And we're testing slightly different things in each of the market.

Robert Wilson

And finally, on depreciation, are you keeping the guidance you provided for depreciation last quarter?

Karen Hoguet

Yes.

Robert Wilson

And income tax rate, the same?

Karen Hoguet

Correct.

Robert Wilson

37%?

Karen Hoguet

For the year.

Operator

We'll take our next question from Mike Shrekgast from Longacre.

Michael Shrekgast

I was wondering if you can talk a little bit on the cost side. If we go back historically to where Macy's was on SG&A relative to where sales -- where last time sales got up to the levels you're guiding to. SG&A was about the level where you guys are guiding to now, maybe slightly less. Just wondering when will we -- given the 4% comp guidance, when will we see more of an inflection and a leveraging of SG&A, you think, so that we see it into the EBIT -- we see more fall to the EBITDA line?

Karen Hoguet

Well, I think you're seeing quite a bit of leveraging. I'm not sure I understand.

Michael Shrekgast

Well, I think you're calling for a 4% growth in sales and it sort of backs into an EBITDA number...

Karen Hoguet

No, we're not calling for a 4% increase...

Michael Shrekgast

Same-store sales?

Karen Hoguet

Right.

Michael Shrekgast

And it sort of back based on your guidance, it backs into an EBITDA number, that's only up 3%.

Karen Hoguet

I'm not sure. I'll have to go back and do that math. I don't think that's the case, but I will check the math and see.

Michael Shrekgast

Okay. Well, I guess, just the main question is, is there a point where we will see more of an inflection in SG&A, and perhaps, it just comes in more in the second half of this year as a lot of the -- obviously, a lot of top line initiatives are really starting to work.

Karen Hoguet

Well, there was -- if look at the first quarter, which is an actual number usually had lower SG&A on a 5% comp. So I do think the performance is such that we will see improvement in EBITDA as we go through the year and beyond.

Operator

We'll take our next question from Ken Stumphauzer with Sterne Agee.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

Just briefly, a confirmation, you said that you anniversary the Search and Send in the second quarter, correct?

Karen Hoguet

That's correct.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

So in the back half of the year, that wouldn't be a drag on gross margins?

Karen Hoguet

That wouldn't, but the free shipping is.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

;

And when would you -- the free shipping was implemented around the holidays?

Karen Hoguet

The beginning of this year.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

Okay. And then as far as the debt metrics that you were indicating, it might hit by year end, does that incorporate any prepay of debt beyond that which is maturing this year?

Karen Hoguet

Not prepay, just what's maturing.

Kenneth Stumphauzer - Sterne Agee & Leach Inc.

Okay. And then one last question. You've talked in the past about small stores outperforming the large stores. I'm curious to know whether that has persisted? And if so, where do you attribute that to?

Karen Hoguet

It is continued. What we're finding is that there are the smaller doors, are performing much better than they had historically and much more similarly to bigger stores, which is terrific. And obviously, that was the dream of My Macy's, with the greater focus on localization and then reduced span of control in the field organization. And we have been able to make a difference to lots of these small stores.

Operator

We'll take our next question from Bob Drbul with Barclays Capital.

Robert Drbul - Barclays Capital

I guess a couple of questions, the first one is in the aspiration to get back to BBB-, will you need to get that designation before you could start resuming your share repurchase?

Karen Hoguet

No. I mean, in fact, we doubled the dividend that was announced this morning before getting that rating.

Robert Drbul - Barclays Capital

Great, okay. And then on the sales trends overall, have you seen any change between the sales trends at Macy's versus Bloomingdale's in the out-performance?

Karen Hoguet

Well, Bloomingdale -- the upper tier of retail is doing better on an absolute basis. So Bloomingdale's has done better, absolute numbers, than Macy’s.

Operator

[Operator Instructions] We'll take our next question from Wayne Hood with BMO Capital.

Wayne Hood - BMO Capital Markets U.S.

Karen, coming back to a couple of topics. One is as you move those credit metrics down to a level that you think that your rating agencies would likely give you a ratings upgrade. I'm just wondering if you're setting yourself up for this disappointment because it was 5 or 6 years ago that Penny also had similar kinds of metrics and was actually performing very well. And the rating agencies did not take them to investment grade and it was because just kind of a dim view they have for the industry. So for you, you do all the work to get them there and you still don't get investment grade. Are you setting yourself up given there's a precedent that, that didn't happen in the past with another company?

Karen Hoguet

I'm not sure I'm setting myself up. I mean if they don't give us the rating, that they don't give us the rating. As I said to Bob, we're not going act differently until we get the rating. So I still think it makes sense to get the balance sheet to these ratios. And my hope is, and my expectation is that the investment grade rating will come. If it doesn't, I still think it's the right thing for the balance sheet.

Robert Drbul - Barclays Capital

Right, okay. I guess, second question I had, can you discuss the progress that you may or may not made with inventory turnover in the first quarter if you strip out the online business? And what kind of progress do expect for the year now that the sales are growing fairly robustly in the turn number?

Karen Hoguet

I would never -- I mean, I don't know why you'd strip out the online business. That's sort of a key part of what we're doing from an inventory turn perspective. But the comp store inventory, which includes the Internet inventory, was up 2.8%, compared to the comp of 5.4%. That's pretty impressive. And as I have said, we are investing in the growth businesses.

Robert Drbul - Barclays Capital

So you are implying that you did have improvement in turn in the first quarter?

Karen Hoguet

Yes.

Robert Drbul - Barclays Capital

Yes. And for the year, do you have a basis point expectations of what you think that turn could be?

Karen Hoguet

I don't. If I could earlier, we're still working on the full plan.

Robert Drbul - Barclays Capital

Okay. And then my last question comes back to the credit side of the business. How much of that is just reserve unwinding versus the overall portfolio growing or some combination of both? And there is...

Karen Hoguet

It's a combination of both.

Robert Drbul - Barclays Capital

Yes. Is there -- the guidance you had given, that would imply some improvement obviously, in the reserve and the performance of the portfolio. And I think Liz got to this is, is how much of the improvement in the SG&A though is really driven by credit in '11?

Karen Hoguet

Well, for the first quarter, you - I mean, I gave you the numbers, $25 million of the improvement was due to credit. Some of that we expect to continue to see it. But at this point, we're still watching the trends very closely. So I can't give you a specific number for the remainder of the year, but we do think it will benefit us

Robert Drbul - Barclays Capital

Yes. But that I was just thinking that there's some implied number in the guidance you’d given, right?

Karen Hoguet

There's none.

Operator

We'll take our next question from Jeff Stein with Soleil Securities.

Jeffery Stein - Soleil Securities Group, Inc.

Karen, a question regarding cost of goods. I'm wondering if vendors are willing to lock in prices as they have in the past, or are they trying to kind of shorten the lead time before they give you a commitment on price?

Karen Hoguet

I'm not sure I'm an expert on this subject, but I have not heard of any change in how we're working with our vendors.

Jeffery Stein - Soleil Securities Group, Inc.

Got it. And as far as your strategy for the back half of the year with respect to pricing, is the goal to kind of maintain your -- protect your merchandise margins, so to speak, with higher selling prices?

Karen Hoguet

No, our goal is to drive sales and keep our customers happy. And our expectation is that we can do that and also maintain our margin.

Jeffery Stein - Soleil Securities Group, Inc.

Got it. And just final question, just looking at the store, obviously, things are going extremely well. But what are kind of some of your priorities from a merchandising standpoint where you're trying to focus and improve underperforming areas? And also, there was a comment in the release this morning that did indicate you're testing a wide range of new ideas and innovations. I'm wondering if you might give us a couple of examples that you're working on.

Karen Hoguet

Yes. I mean I would say, and it's not because it's an underperforming business but because we see opportunity, but we're spending a lot of time focused on the used businesses, which we started with Material Girl and Bar III, the new private brand we launched, and that will continue. So that's the big area of focus as we go forward. So again, not an underperforming business but one where we see a lot of opportunity for us to grow and keep the comp stores’ growth going as fast as it's been. In terms of some of the innovations, 2 that come to mind, we're beginning to use iPads in our stores in different ways and bringing more technology into the stores. Another would be the Impulse Beauty area, which I think probably all of you have now seen. It's in about 75 locations, with another 25-plus going in the remainder of this year. But we started slowly and tested, bringing in smaller lines, have really geared to that younger customer and the departments are doing extraordinarily well.

Operator

We'll take our next question from David Glick with Buckingham Research.

David Glick - Buckingham Research Group, Inc.

I'm just wondering if you could update us on the investments you're making in macys.com and bloomingdales.com in terms of infrastructure investments and hiring? And how you see that ramping up the balance for this year and in 2012? And what kind of impact that's going to have on SG&A growth in the next year and a half?

Karen Hoguet

No, we haven't actually quantified the expense invested we're making but it's obviously material. When you've got a business growing at 38% and we're -- expect that trend to continue, we're obviously adding quite a bit, but I can't give you a specific dollar number, David. And in terms of the capital investments, those continue to be made as well.

David Glick - Buckingham Research Group, Inc.

Do you see that having more of an impact on this year or next year in terms of the expense side?

Karen Hoguet

My guess is going -- if that business keeps growing as it's growing and as we expect it to, I think it's going to continue to have an impact. And what's interesting is, 5 years ago, we thought of it as a separate business, the Internet. Today, it's getting so intermingled with how we're operating the stores that it's frankly just an investment in the total growth of Macy's, Inc.

Operator

We have no further questions at this time. I'd like to turn the conference back over to Ms. Karen Hoguet for any additional or closing remarks.

Karen Hoguet

Well, great, and thank you all for your interest and support and if you have any additional questions, obviously, feel free to call us. And thanks. Take care.

Operator

That does conclude today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Macy's Management Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts