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Macy's, Inc. (NYSE:M)

F3Q07 Earnings Call

November 14, 2007 10:30 am ET

Executives

Karen M. Hoguet - Chief Financial Officer, Executive VicePresident

Analysts

Deborah Weinswig - Citigroup

Uta Werner - Sanford Bernstein

Adrianne Shapira - Goldman Sachs

Dana Cohen - Banc of America Securities

Christine Augustine - Bear Stearns

Jeff Stein - Keybanc Capital Markets

Liz Dunn - Thomas Weisel Partners

Charles Grom - J.P. Morgan Chase

Robert Wilson - Tiburon Research

Robert Drbul - Lehman Brothers

Virginia Chandlis - J.P. Morgan

Michelle Tan - UBS

Michael Exstein - Credit Suisse

Dana Telsey - Telsey Advisory Group

David Glick - Buckingham Research

John Barrett - Columbia Management

Operator

Good morning and welcome to the Macy’s third quarter earnings releaseconference call. This call is being recorded. I would now like to turn the callover to your host, Karen Hoguet. Please go ahead.

Karen M. Hoguet

Thank you and good morning, everyone and welcome to theMacy’s Inc. conference call. I am Karen Hoguet, CFO of the company. Anytranscription or other reproduction of the statements made in this call withoutour consent is prohibited. A replay of the call will be available on our website,www.macysinc.com, beginning approximately two hours after the call concludes.Please refer to the investor relations section of our website for a discussionand reconciliations of any non-GAAP financial measures discussed this morning.

Keep in mind that all forward-looking statements are subjectto risks and uncertainties that could cause the company’s actual results todiffer materially from the expectations and assumptions mentioned today due toa variety of factors that affect the company, including the risks specified inthe company’s most recently filed Form 10-K and Form 10-Q.

We are pleased to have produced earnings at the high-end ofour expectations -- $0.10 a share versus our guidance of $0.05 to $0.10, withsales at the low-end of our expectations, $5.9 billion versus the guidance of$5.9 billion to $6 billion. However, we would have been happier had our salestrends been stronger in the quarter.

We are encouraged, however, to see the business in many ofthe former May doors strengthening and to see the home categories continuing toperform well.

When we think about the reasons for the change in the trendin home, it is really a confluence of factors. The Martha Stewart launch, theintroduction of the big ticket business on macys.com, improved localization ofassortments, and improved marketing, including Internet advertising.

During the quarter, the center core categories of businessalso performed well, particularly sleepwear, watches, handbags and fragrances,all of which are important fourth quarter gift categories.

The men’s business did okay in the quarter, although salesof basic seasonal commodities were slow, probably largely due to weather. Butmen’s collections and other differentiated products sold well.

The most concerning trend, as you know, was in women’sapparel. Some of this is clearly weather related but there does not appear tobe enough in the fashion offering that is compelling. There was some strengthduring the quarter in items where we made investments -- fashion sweaters,jackets, and outerwear, but basics did not sell as well as we had expected.However, with the colder weather, this business has improved.

Gross margin on a recurring basis in the quarter was 39.3%,down one point from last year. As you know, we expected a lower gross marginrate than last year during the third quarter, although this was lower than wehad expected. We took lots of markdowns in the quarter, particularly on readyto wear, to keep our inventories appropriately current.

SG&A in the quarter before May related integration costswas $2.121 billion, 1.3% above a year ago in dollars and 0.3 points higher as apercent of sales. We did a good job of managing expense in the quarter.

Depreciation expense in the quarter was $321 million, up $6million versus last year but a little lower than we had expected.

Operating income excluding inventory valuation adjustmentsand integration costs was $200 million this year versus $279 million a yearago. There were no May company related inventory valuation adjustments thisyear in the quarter, and last year there were $28 million, and the integrationcosts associated with the May acquisition were $17 million this year versus$117 million a year ago.

Interest expense in the quarter was $145 million, which wasa little below the expected $150 million.

Book taxes in the quarter benefited by approximately $10million of tax benefits related to the adjustment or settlement of tax issues.With the adoption of FIN-48, our effective tax rate will vary more by quarterthan it has in the past. We now have to reflect discrete items as they happenin each quarter, as opposed to reflecting them in the annual effective taxrate. This makes our quarterly tax rates harder to predict and they will bemore lumpy than in the past, particularly in quarters with lower operatingincome.

Share count on a diluted basis was 438 million shares in thequarter, down 20% from last year’s 550 million shares due to our stockrepurchase activity. Earnings per share excluding integration costs on adiluted basis was $0.10 in the quarter, again versus our guidance of $0.05 to$0.10 and last year’s $0.20 per share.

Moving on to cash flow, net cash provided by continuingoperating activities was $285 million in the first nine months of the year,compared to $1.971 billion in the first nine months of last year, but pleaseremember that the 2006 number included almost $1.9 billion in proceeds from thesale of a portion of the credit card portfolio. Excluding that, operating cashflow in 2007 was $174 million higher than a year ago.

Our inventories at the end of the quarter are in good shapeand well-positioned for the fourth quarter, both in quantity and quality.

Net cash used by continuing investing activities this yearwas $618 million, compared to an inflow last year of $865 million. Here tothough you need to remember that we had net proceeds from the credit card andother asset sales of $1.7 billion last year compared to $163 million this year.

CapEx through the third quarter was $781 million compared to$865 million last year, which as you’ll recall included the capital for thename change and store conversion. We still expect to spend approximately $1.1billion in this year versus $1.4 billion a year ago.

Net cash used by continuing financing activities was $602million in the first nine months of 2007, compared to $2.345 billion last year.During the first nine months of this year, we issued $2.9 billion of long-termdebt, including $350 million issued during the third quarter, and we repaid$647 million of long-term debt.

At the end of the quarter, we had $968 million in commercialpaper outstanding, representing our seasonal working capital needs.

During the third quarter, we bought back 2.7 million sharesof stock for a total of $84 million. This brings the total buy-back executedfor this year to $3 billion, and we bought back 72 million shares this year.This compares to $1.1 billion in stock repurchases last year.

Given the current condition in the credit markets, we arecarefully evaluating our options with respect to the timing of completing ourremaining $1 billion authorization. As a result, some or most of that $1billion could end up being deferred into next year. While we are optimisticabout our prospects, and we believe the stock today represents a great value,we do need to balance this with the benefits of preserving access to allfinancial markets during these volatile times in the credit market.

Let’s move on now to the fourth quarter. We have lowered oursales expectations but not our earnings guidance. We now expect total sales inthe fourth quarter of $8.7 billion to $8.9 billion. This is reduced from ourprior guidance of $8.8 billion to $9 billion. Remember that last year, thefourth quarter had an additional week in it, so total sales are expected to bedown versus a year ago.

But on a 13-week to 13-week comparison, we are now expectingcomp store sales to be down 2% to up 1%. We are not giving specific guidancefor November since we view November/December as really one selling season, butdo remember that this year’s calendar has the early Thanksgiving, which willresult in November’s sales increase over a year ago to be very dramatic, whileDecember is expected to be down versus a year ago.

We are still expecting the fourth quarter gross margin rateto be above a year ago and we are still expecting SG&A to also increase asa percent of sales.

For depreciation expense, we are still expectingapproximately $335 million and interest expense of approximately $140 million,and we are still expecting earnings per share on a diluted basis, excludingintegration costs, of $1.70 to $1.80.

We are now expecting integration costs of roughly $60million to $70 million in the fourth quarter, most of which will be non-cash.For the year as a whole, we underestimated the non-cash integration costs thatwe would be incurring this year.

Let me reassure you that this is non-recurring expenseassociated with the integration. We will be able to provide additional detailwhen we report the fourth quarter.

We believe we are well-prepared for the fourth quarter. Ourinventories are in good shape. We have a lot of newness in the stores,including the Martha Stewart Collection at Macy’s. The marketing for bothMacy’s and Bloomingdale’s is fresh and compelling, representing a balance ofbrand and promotional messages. And we have very strong holiday events to focusattention on our stores and to drive customer traffic.

While there has been a lot written about the economy and theconfidence level of the American consumer, we all will just have to wait to seehow it actually plays out in retail spending for the holiday. But we believe wehave all of the ammunition in place to compete successfully through the season.

With that, I’ll open the call up for your questions.

Question-and-AnswerSession

Operator

(Operator Instructions) We’ll go first to Deborah Weinswig withCitigroup.

Deborah Weinswig -Citigroup

Good morning. Karen, with regard to the share repurchase,would the comments that you made regarding the credit markets, would that alsoapply to the share repurchase activity that we saw in the third quarter?

Karen M. Hoguet

No, you know, we had always expected to buy back about $3billion before the fourth quarter, so we had just completed that a little bitearlier than we had anticipated.

Deborah Weinswig -Citigroup

And then, did the business come back -- I don’t know howmuch you can talk about November, but with cooler weather starting to settle inaround most of the country, have you see the business pop back as you wouldhave expected across categories?

Karen M. Hoguet

Business has improved with the colder weather, which is goodnews. Now, it’s hard to predict November sitting here today with the weeks wehave to come, so I don’t want to predict November but at least as the weathergot colder, business has improved.

Deborah Weinswig -Citigroup

Okay, and then last question, there’s been a lot ofdiscussion about having a very promotional holiday season year over year. Whatare your thoughts on that at this point in the game?

Karen M. Hoguet

Holiday seasons are always promotional, so I don’t expectthere to be a dramatic change from last year.

Deborah Weinswig -Citigroup

Great. Thanks so much.

Operator

We’ll go next to Uta Werner with Sanford Bernstein.

Uta Werner - SanfordBernstein

Good morning. I wonder, Karen, if you could give us someguidance related to anymore store openings or store closings coming up in thefourth quarter and then in the next fiscal year. Thank you.

Karen M. Hoguet

There are no store openings, I believe, happening in thefourth quarter. I think all of the stores have been opened this year. And storeclosings we announce as we make those decisions and no decisions have beenmade.

And for next year, I don’t have the store count in front ofme but I think it is around six or seven new stores for 2008.

Operator

We’ll go next to Adrianne Shapira with Goldman Sachs.

Adrianne Shapira -Goldman Sachs

Thanks. Karen, just as far as the fourth quarter guidance,no change but you are tempering the sales outlook. Is that because inventoriesare very clean heading into the fourth quarter? Just give us a sense whatenabled you to deliver the original earnings guidance?

Karen M. Hoguet

We, as we’ve been thinking about the quarter, just refinedSG&A, margin, all of the various components and we believe we can stillachieve those earnings with the lower sales.

Adrianne Shapira -Goldman Sachs

Okay, so in terms of the breakdown between gross margin andSG&A, what should we look for in terms of more of a lever to get you there?

Karen M. Hoguet

I’m not giving more guidance on that.

Adrianne Shapira -Goldman Sachs

Okay, and then Karen, just last call you had mentioned thatthe upscale customer was still strong. Can you just give us an update there? Itsounds as if perhaps recently some trends we are hearing out of Nordstrom,Bloomingdale’s, it sounds like it’s softened. Just tell us what you are readingwith that customer.

Karen M. Hoguet

Bloomingdale’s had a good third quarter, so it’s hard totell what’s weather, what’s other factors, so I really don’t know how to answerthat, other than the fact Bloomingdale’s had a good third quarter.

Adrianne Shapira -Goldman Sachs

Okay, and then just lastly, any way to help us quantify thatcalendar shift between November and December?

Karen M. Hoguet

You know, it’s really difficult, so the answer is no.

Adrianne Shapira -Goldman Sachs

Okay, thanks.

Operator

We’ll go next to Dana Cohen with Banc of America Securities.

Dana Cohen - Banc ofAmerica Securities

Hey, Karen, a couple of questions; first, following up onthe prior question, you said consistently that it would be hard to getincremental SG&A improvement in the fourth quarter because of how much yougot last year. I mean, has there been a change in that here in Q4 as you’verefined your estimates?

Karen M. Hoguet

No, I mean, as you heard me say, we are still expectingSG&A to be up as a rate year over year, so that’s still an issue as we comparequarters.

Dana Cohen - Banc ofAmerica Securities

But maybe not quite as big an issue?

Karen M. Hoguet

Correct, but it’s still an issue.

Dana Cohen - Banc ofAmerica Securities

Okay, and then can you tell us, with two-plus years into thecombination, can you give us some sense of what the integration costs are thatyou are still looking at to the magnitude of the number you are talking aboutin Q4?

Karen M. Hoguet

I think let’s talk about it after we report fourth quarter.

Dana Cohen - Banc ofAmerica Securities

Okay, and then lastly, can you just give us a sense of whatyou are seeing on the credit side? I mean, we know you don’t own it but whattrends are you seeing in that piece of the business?

Karen M. Hoguet

You know, credit, our penetration continues to go up and infact, in the third quarter, it was up 100 basis points over a year ago.Year-to-date, it’s up 250 basis points over a year ago, so that’s good news.Marketing around our credit card is going well.

We are experiencing rising delinquency, but we are alsotrying to mitigate that with a collection strategy, so we’ll see as we getthrough the fourth quarter.

Dana Cohen - Banc ofAmerica Securities

Great. Thanks so much.

Operator

We’ll go next to Christine Augustine, Bear Stearns.

Christine Augustine -Bear Stearns

Thank you. Karen, I just want to be sure I am clear on youroutlook for 4Q. If in fact, because of what is going on in the credit markets,you may push out the $1 billion, roughly, that’s left on the buy-back, thenthat -- my conclusion there would be then operationally, things are actuallylooking better than they were when you guided to this previously because theremay not be as much buy-back, but please correct me if I’m wrong.

Karen M. Hoguet

No, I mean, Christine, the truth is that’s why we give arange of estimates. If we don’t buy back the $1 billion, obviously theoperations are going to have to do better to get to the same earnings. But thatis part of the reason we give a range.

It’s not as precise as you all think to estimate earningsgoing forward, so we do the best that we can as we provide guidance.

Christine Augustine -Bear Stearns

Okay, and then the other question I had was on the -- onsome of the improving trends in the home business that you are seeing, one ofthe things you mentioned was the better localization of the assortments, andI’m wondering if you’d be willing to comment on where you think you are -- Ithink it’s three years since you centralized home. How are you feeling aboutthat whole process? Is it something that you would contemplate at some point inthe future for the rest of the division?

Karen M. Hoguet

Let me first address home. It is three years into theprocess but we are feeling really good about it now. A couple of weeks ago, Ihad the opportunity to spend a day at the home division and just listening tothe merchants talking about how much they’ve learned about the fact thatassortments are different store to store, even within markets, and how they areworking to localize those assortments to meet the local needs is terrific. Andthat’s something we are applying throughout the company. There’s a projectunderway that we call My Macy’s, but it really is trying to focus on bettertailoring our assortments door-to-door. And I believe that’s now happening atthe home store.

Christine Augustine -Bear Stearns

Okay, and then just in the future, would you contemplatesome sort of centralization process for the rest of the division?

Karen M. Hoguet

The key right now, Christine, is to get the comp store salesgoing and as long as we are localizing the assortment through our divisionstructure, that’s the way we will do it. With apparel, it’s a little trickierthan home, for example, so we just continue to learn and again, as long as thecomp store sales continue to come the way we are expecting in ’08 and beyond,we’ll again keep with our structure.

Christine Augustine -Bear Stearns

Thank you.

Operator

We’ll go next to Jeff Stein, Keybanc Capital Markets.

Jeff Stein - KeybancCapital Markets

In the press release, Terry alluded to the fact that you’vegot a wide range of new and distinctive merchandise for the holiday season andI presume that Martha is a part of that. I’m wondering, is there anything elsethat you can call out that you are counting on that truly differentiates youfor the holiday selling season?

Karen M. Hoguet

Sure. Let me mention a few things. One, while I know itdoesn’t sound like it differentiates us, is cashmere. But now that I’ve seensome of the variety and the new items we’ve brought in that are cashmere, Iwould put that on the list of new and different merchandise in terms ofsweaters, scarves, gloves, et cetera.

We’ve also got an expanded candy offering, including Frangosand a new private label line of chocolates, which absolutely are delicious.

Electronic picture frames I think will be hot, and thenthere’s a couple of items on macys.com that I probably should point to. One isa personalized EGC, where you can put your picture on an EGC to give as a gift.This is something we’ve been experimenting with. We are now gaining confidenceand we’ll begin to market it as we go to the fourth quarter, but I think thatcould be big.

And also the Rwandan basket program on macys.com continuesto be important. As you know, those are hand-woven baskets and bowls that aremade by women in Rwanda that frankly is giving them real sustainable income.And by the way, the baskets are terrific looking, so I think that’s againanother example of differentiated merchandise that we are offering withinMacy’s.

Jeff Stein - KeybancCapital Markets

Karen, you called out several items from macys.com. Youreally haven’t commented on the growth of that business in third quarter. I’mwondering if you could just provide us with an update on how that business isperforming to plan and what kind of sales we might expect for the full yearfrom .com?

Karen M. Hoguet

Macys.com has continued to have very big increases versus ayear ago and we continue to feel really good about that business. I don’t havethe annual forecast in front of me, but we feel great about macys.com.

Jeff Stein - KeybancCapital Markets

Okay, and Martha Stewart, any sense in terms of whether ornot this is driving new customers into the store? I’m wondering if you mighthave any statistics to share with regard to perhaps opening up new credit cardaccounts with Martha purchases and so fort.

Karen M. Hoguet

I don’t have any specific statistics on that. What’s beeninteresting is not only has the Martha product been performing well, but webelieve it’s also driven people into our home departments, perhaps other partsof the store and helped the overall home business. So we feel really good aboutthat but I don’t have any specific statistics, Jeff.

Jeff Stein - KeybancCapital Markets

Okay. Thank you.

Operator

We’ll go next to Liz Dunn, Thomas Weisel.

Liz Dunn - ThomasWeisel Partners

Good morning. I guess my first question is can you discussany geographic differences in the comp trend that you’ve seen and any color onwhat’s driving those variances? And then, related to the integration costs, I’massuming your comments suggested that you’ll be able to discuss in detail whatsort of activities are still going on on the fourth quarter call, but if youcan’t discuss that now, could you at least tell us whether or not there will beany integration expense beyond the fourth quarter of this year?

Karen M. Hoguet

The May company integration expenses will be done at the endof ’07, so that will be over, and yeah, we will talk about it in the fourthquarter.

In terms of your first question on geographies, the weakestgeography has been the Midwest in the third quarter. That had not been the caseearlier in the year in terms of the whole Midwest. And part of that relates Ibelieve to markets where the Macy’s brand is newer and it’s taking longer togain acceptance.

Liz Dunn - ThomasWeisel Partners

Okay, and anything in Californiaor Florida to call out?

Karen M. Hoguet

Florida’s had a tougher third quarter than they had earlierin the year but still on an absolute basis doing okay. And California’s donefine.

Liz Dunn - ThomasWeisel Partners

All right, great. Thank you.

Operator

We’ll go next to Charles Grom, J.P. Morgan Chase.

Charles Grom - J.P.Morgan Chase

Thanks. Good morning. Karen, was there a shift in themarkdown expenses from the calendar shift in 3Q that’s benefiting the fourthquarter margin outlook?

Karen M. Hoguet

Yeah, that’s what we had said in August when we talked aboutthe guidance by quarter. We had said we expected the margin to be below a yearago in the third quarter and above a year ago in the fourth quarter for thatreason. But that’s not new news, but --

Charles Grom - J.P.Morgan Chase

No, no -- could you quantify that for us?

Karen M. Hoguet

No.

Charles Grom - J.P.Morgan Chase

Okay, you know, if I look at the fourth quarter, you cycle afantastic from a year ago when margins were up close to 200 bps. If my math iscorrect, if I don’t model any buy-backs in the fourth quarter, it implies abouta 30 basis point decline, which if you kind of two-year stack, it looks prettyaggressive. I’m just wondering if you can give us some drivers there we shouldlook forward to to get that margin improvement on a two-year basis.

Karen M. Hoguet

There’s really nothing I can point to at this time. We’lltalk about it at the end of the quarter.

Charles Grom - J.P.Morgan Chase

Okay, and then last, just to be clear on the merger andintegration charges of $60 million to $70 million, I just want to make sure itdoes not include any expectations for future store closings.

Karen M. Hoguet

It includes what we expect to have happening during thefourth quarter.

Charles Grom - J.P.Morgan Chase

Okay, but you are not willing to comment on the storeclosings?

Karen M. Hoguet

Correct.

Charles Grom - J.P.Morgan Chase

All right. Thanks a lot.

Operator

We’ll go next to Robert Wilson with Tiburon Research.

Robert Wilson -Tiburon Research

Thank you. How do you go from $150 million to $160 millionmerger/integration costs to now $210 million to $220 million in a three-monthtimeframe?

Karen M. Hoguet

Well, it’s a combination of not anticipating all of thenon-cash write-offs and making some new decisions. But again, most of the increaseis non-cash.

Robert Wilson -Tiburon Research

Right. It just seems like such a large increase in athree-month timeframe.

Karen M. Hoguet

I understand.

Robert Wilson -Tiburon Research

Okay. What tax rate should we be using for Q4?

Karen M. Hoguet

Well, you know, as I indicated relating to the FIN-48, it’sgoing to be much harder to predict that and we are not giving guidance byquarter for that reason. Sorry.

Robert Wilson -Tiburon Research

Okay. Thank you.

Operator

We’ll go next to Robert Drbul with Lehman Brothers.

Robert Drbul - LehmanBrothers

Good morning, Karen. A couple of questions; the first one iscan you just talk about any inventory adjustments that you’ve made going intothe fourth quarter, and just how you are thinking of inventories as you headinto the spring at this point in time?

Karen M. Hoguet

I’m not sure what you mean by inventory adjustments.

Robert Drbul - LehmanBrothers

Did you have any major cancellations or did you push backinventory, given the expectation for the sales that you have at this point?

Karen M. Hoguet

We would never delay inventory. We are always canceling andchanging based on what is selling and not selling, so there is not any majorstructural change that’s happened and in any given department, there are thingsthat are selling, there are things that aren’t and we try to react to ourfuture inventories that way.

Robert Drbul - LehmanBrothers

Can you talk about the traffic trends that you had in thethird quarter and what your expectations are for the fourth quarter in terms ofyour comps?

Karen M. Hoguet

We don’t have a good measure of traffic to help you there.Sorry.

Robert Drbul - LehmanBrothers

Okay, and then the -- you talked about the new Macy’s storesgetting a little bit better. Can you maybe address the spread on the legacyMacy’s stores versus the new Macy’s stores and how that is trending currently?

Karen M. Hoguet

Well, as we’ve said, that spread is narrowing and we’refeeling much better about the performance of most of the May doors.

Robert Drbul - LehmanBrothers

And on the private label and/or the exclusive side of it,have there been discernible differences in the legacy Macy’s doors versus thenew Macy’s doors recently? Has it gotten any better in terms of how that’s --

Karen M. Hoguet

I don’t have the specific numbers in front of me but theprivate brand has done very well in the former May doors as well as the legacydoors, relative to what else is in the store. So private brands have been wellaccepted in the former May doors.

Robert Drbul - LehmanBrothers

Great. Thank you.

Operator

We’ll go next to Virginia [Chandlis] with J.P. Morgan.

Virginia Chandlis -J.P. Morgan

Could you just clarify a little bit your comments that youmade in the prepared section about wanting to maintain I guess access tovarious forms of financing, that perhaps you are referring to commercial paperand therefore commitment to your mid triple-B rating?

Karen M. Hoguet

Well, I mean, I think you sort of said it. We like access tothe A2/P2 commercial paper market. And I think given all that’s gone in thecredit markets, that’s probably a good thing to maintain. And therefore, we arejust being prudent as we go to spend that $1 billion.

Virginia Chandlis -J.P. Morgan

Okay. I mean, is your commitment to that strong enough thatperhaps if your operating results came in a little softer than you areexpecting, that you’d be willing to maybe apply a little bit more of your freecash flow to debt reduction to maintain your ratios to a level that the ratingagencies are comfortable keeping you at mid triple-B?

Karen M. Hoguet

I think the only thing we can really impact is the buy-back.

Virginia Chandlis -J.P. Morgan

Okay.

Karen M. Hoguet

And this is all about balance, and we’ll just see as we goforward.

Operator

We’ll go next to Michelle Tan with UBS.

Michelle Tan - UBS

Great, thanks. Most of my questions have already been askedbut I was just wondering, in the Midwest, as you look at some of the sloweracceptance of the Macy’s brand, can you give us any color on changes you aremaybe making to the assortment to try to better target that customer?

Karen M. Hoguet

Well, we are doing there what we are doing everywhere, whichis trying to better localize our assortments and get more of what’s selling andhave less of what’s not and try to react.

Michelle Tan - UBS

Is there any guidance on whether it’s more moderate product,any particular vendors or anything like that?

Karen M. Hoguet

You know, interestingly the better product and the moredifferentiated product is what is selling everywhere, so we just need tocontinue to refine it. It will happen.

Michelle Tan - UBS

Okay, great. And then looking at the tax rate for nextquarter, I know you don’t know any -- you can’t give a specific guidance numberbut is there any way to get a directional sense of whether it’s going to be abenefit or a drag?

Karen M. Hoguet

What do you mean? Tax is almost reduce --

Michelle Tan - UBS

No, I know, but I mean relative to kind of a normal level oftax rate that we would expect.

Karen M. Hoguet

You know what, I just can’t predict. I don’t expect anymajor deviation because remember, a $10 million adjustment in the fourthquarter wouldn’t move the needle, given the amount of operating income. Theproblem is in a quarter like the third quarter, which has lower operatingincome, these relatively small adjustments for a company our size can becomemeaningful to a tax rate.

Michelle Tan - UBS

Okay, perfect. That’s helpful. Thank you.

Operator

(Operator Instructions) And we’ll go to Michael Exstein,Credit Suisse.

Michael Exstein -Credit Suisse

Good morning, Karen. A couple of quick questions for you.Number one, there was an unfortunate incident where your Black Friday ad gotout onto the Internet early. Have you done anything to modify your promotionalstrategy to keep the initiative in that regard? Number one -- number two, ingeneral can you talk about your advertising spend, both in the quarter we justfinished and what your anticipation is going forward? Thank you ever so much.

Karen M. Hoguet

Yeah, no. Obviously I am not going to comment on ourpromotional strategy, or we would have let the material stay on that website.By the way, they are no longer there.

In terms of the advertising, the key is that our calendarthis year is comparable to last year and when we think about the mix withinthat calendar, we are doing more promotionally versus brand than we did a yearago.

Michael Exstein -Credit Suisse

Does that mean more of [inaudible]?

Karen M. Hoguet

It could.

Michael Exstein -Credit Suisse

And then finally, last but not least, what is your -- yougave us an interest assumption in the fourth quarter. What does that bake infor your buy-back? Obviously a cause and effect relationship there.

Karen M. Hoguet

It’s actually not that big of an impact in one quarter, andI’m obviously not going to tell you what I’m assuming for the buy-back, so --sorry.

Michael Exstein -Credit Suisse

All right. Thank you.

Operator

We’ll go next to Dana Telsey with Telsey Advisory Group.

Dana Telsey - TelseyAdvisory Group

Good morning, Karen. Can you talk a little bit about theTommy Hilfiger arrangement, the opportunities that provide you -- and if thatcould be done in other segments, perhaps women’s apparel, also? And just anyupdate on the credit card penetration of sales in both the legacy stores andthe converted stores. Thank you.

Karen M. Hoguet

Sure. On the Tommy subject, this is an extremely excitinginitiative for us and the Tommy brand is doing very well now in our stores, andto have this on an exclusive basis other than their stores is really terrific.And we do hope that there will be other agreements like this.

Dana Telsey - TelseyAdvisory Group

And then on the credit card?

Karen M. Hoguet

I’m sorry, on the -- interestingly, the difference betweenthe legacy stores and the former May stores are really beginning to converge.The legacy doors were about 48% in the quarter and the former May doors were47%. So I think it’s really becoming a non-issue between the two.

Dana Telsey - TelseyAdvisory Group

Great. Thank you.

Operator

We’ll go next to David Glick with Buckingham Research.

David Glick -Buckingham Research

Good morning, Karen. Most of my questions have beenanswered, just one quick follow-up on the former May doors; is the improvementin the home business, as you’ve advertised more in those former May markets, isthat really the biggest driver as you see the gap narrowing between legacy andnew Macy’s?

Karen M. Hoguet

Well as you know, home had been the biggest weakness lastyear in those stores, so obviously the improvement in home is helping thosestores considerably, but other part so the stores, of the former May doors areimproving as well.

David Glick -Buckingham Research

Okay, great. Thanks a lot. Good luck.

Operator

We’ll go next to John Barrett with Columbia Management.

John Barrett -Columbia Management

A quick question, just on the credit card losses; can youquantify the rising delinquencies, from what percent to what percent?

Karen M. Hoguet

No, I can’t. Sorry. And remember, those are now owned byCiti, so it’s really less of a factor in our income this year than it wouldhave been prior to selling the receivables to Citi.

John Barrett -Columbia Management

I understand that but you should have that information.

Karen M. Hoguet

Having it, yes; disclosing it, no.

John Barrett -Columbia Management

Okay. Let me ask it this way then; assuming delinquenciesrise, the impact that that has on your P&L, you’re getting a fee back onthat relationship --

Karen M. Hoguet

Most of our income that comes from Citi for the receivablesrelates to the top line in terms of opening and activating new accounts andthrough credit sales. So the fact that our penetration is good and credit saleshave been good helps that credit income. There is also a profit sharing formulaon the bottom line but that’s a very small portion of what we get paid.

John Barrett -Columbia Management

Okay, so rising delinquencies won’t impact your SG&A?

Karen M. Hoguet

It will, but not by as much as it would have had we ownedthe whole [portfolio] on the business.

John Barrett -Columbia Management

I understand, but it’s an impact on your SG&A?

Karen M. Hoguet

Correct.

John Barrett -Columbia Management

Okay. In terms of your CapEx for next year, is it safe toassume that less will be expensed and more capitalized than in 2007?

Karen M. Hoguet

I’m not sure I understand the expense --

John Barrett -Columbia Management

Well, you’ll spend $1.1 billion and there’s a portion that’scapitalized versus expensed.

Karen M. Hoguet

No, that’s all capital. That’s all capitalized.

John Barrett -Columbia Management

That’s all capitalized, not expensed?

Karen M. Hoguet

Correct.

John Barrett -Columbia Management

Okay, and lastly, you didn’t comment on traffic, but couldyou talk about average ticket? What was that up versus or down versus lastyear?

Karen M. Hoguet

Average ticket went up in the quarter. I don’t have a specificnumber but it did go up, which is obviously a good trend.

John Barrett -Columbia Management

Okay. Thank you.

Operator

(Operator Instructions) We’ll go next to Christine Augustinewith Bear Stearns for a follow-up.

Christine Augustine -Bear Stearns

Thank you. Karen, what sort of trends are you seeing interms of cost of goods sold? Any inflationary pressures starting to creep intowhat the buyers are placing for the next couple of quarters, or maybe thespring season, if you can comment on that at all?

And then, when the merger was originally closed, I think oneof the areas that you addressed or thought you might be able to address over alonger term period was the marketing spend, and that at some point there mightbe some additional efficiencies, assuming that the sales trends were where youwanted them to be for the former May stores. So is there any update that youcould provide on your thoughts surrounding marketing spend longer term? Thankyou.

Karen M. Hoguet

In terms of your first question, it is a subject we aretalking about more and more but so far have not seen it reflected in orders forthe spring. But we are talking about it more as a potential subject.

In terms of the marketing spend, we continue to thinkthere’s an opportunity to bring that number down but as you said, we were notwilling to do it until we felt that the sales of the company were performingwell enough that we could start tweaking advertising, and obviously that hasnot happened yet but it is still something that we would anticipate happeningat some point, hopefully soon.

Christine Augustine -Bear Stearns

Thank you.

Operator

We have a follow-up from Robert Wilson.

Robert Wilson -Tiburon Research

Karen, you mentioned on the last call that furniture had agood month in July. How did furniture trend throughout Q3?

Karen M. Hoguet

Furniture had a great quarter and it’s continued to do well.

Robert Wilson -Tiburon Research

Okay, and when you report November comp sales, are you goingto provide an expectation for December?

Karen M. Hoguet

Yeah, because we’ll be talking about the expectation for theperiod.

Robert Wilson -Tiburon Research

Okay. Should we expect maybe a double-digit increase forNovember and a similar decrease for December?

Karen M. Hoguet

I can’t comment on either side.

Robert Wilson -Tiburon Research

Okay, fair enough. Thank you.

Operator

Ms. Hoguet, there are no further questions at this time.

Karen M. Hoguet

Great. Well, thank you all for your interest and if you havefurther questions, let Susan or I know. Take care.

Operator

That concludes today’s teleconference. Thank you for yourparticipation.

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Source: Macy’s F3Q07 (Qtr End 11/3/07) Earnings Call Transcript

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