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

posted on: November 14, 2007 | about stocks: M

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Macy's, Inc. (M)

F3Q07 Earnings Call

November 14, 2007 10:30 am ET

Executives

Karen M. Hoguet - Chief Financial Officer, Executive Vice President

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

Presentation

Operator

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

Karen M. Hoguet

Thank you and good morning, everyone and welcome to the Macy’s Inc. conference call. I am Karen Hoguet, CFO of the company. Any transcription or other reproduction of the statements made in this call without our consent is prohibited. A replay of the call will be available on our website, www.macysinc.com, beginning approximately two hours after the call concludes. Please refer to the investor relations section of our website for a 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 are pleased to have produced earnings at the high-end of our expectations -- $0.10 a share versus our guidance of $0.05 to $0.10, with sales 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 sales trends been stronger in the quarter.

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

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

During the quarter, the center core categories of business also 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 sales of basic seasonal commodities were slow, probably largely due to weather. But men’s collections and other differentiated products sold well.

The most concerning trend, as you know, was in women’s apparel. Some of this is clearly weather related but there does not appear to be enough in the fashion offering that is compelling. There was some strength during 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 margin rate than last year during the third quarter, although this was lower than we had expected. We took lots of markdowns in the quarter, particularly on ready to wear, to keep our inventories appropriately current.

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

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

Operating income excluding inventory valuation adjustments and integration costs was $200 million this year versus $279 million a year ago. There were no May company related inventory valuation adjustments this year in the quarter, and last year there were $28 million, and the integration costs 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 was a little below the expected $150 million.

Book taxes in the quarter benefited by approximately $10 million 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 quarter than it has in the past. We now have to reflect discrete items as they happen in each quarter, as opposed to reflecting them in the annual effective tax rate. This makes our quarterly tax rates harder to predict and they will be more lumpy than in the past, particularly in quarters with lower operating income.

Share count on a diluted basis was 438 million shares in the quarter, down 20% from last year’s 550 million shares due to our stock repurchase activity. Earnings per share excluding integration costs on a diluted 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 continuing operating 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 please remember that the 2006 number included almost $1.9 billion in proceeds from the sale of a portion of the credit card portfolio. Excluding that, operating cash flow in 2007 was $174 million higher than a year ago.

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

Net cash used by continuing investing activities this year was $618 million, compared to an inflow last year of $865 million. Here to though you need to remember that we had net proceeds from the credit card and other 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 the name change and store conversion. We still expect to spend approximately $1.1 billion in this year versus $1.4 billion a year ago.

Net cash used by continuing financing activities was $602 million 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-term debt, 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 commercial paper outstanding, representing our seasonal working capital needs.

During the third quarter, we bought back 2.7 million shares of stock for a total of $84 million. This brings the total buy-back executed for 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 are carefully evaluating our options with respect to the timing of completing our remaining $1 billion authorization. As a result, some or most of that $1 billion could end up being deferred into next year. While we are optimistic about 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 all financial markets during these volatile times in the credit market.

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

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

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

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

We are now expecting integration costs of roughly $60 million 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 that we would be incurring this year.

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

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

While there has been a lot written about the economy and the confidence level of the American consumer, we all will just have to wait to see how it actually plays out in retail spending for the holiday. But we believe we have 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-Answer Session

Operator

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

Deborah Weinswig - Citigroup

Good morning. Karen, with regard to the share repurchase, would the comments that you made regarding the credit markets, would that also apply 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 $3 billion before the fourth quarter, so we had just completed that a little bit earlier than we had anticipated.

Deborah Weinswig - Citigroup

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

Karen M. Hoguet

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

Deborah Weinswig - Citigroup

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

Karen M. Hoguet

Holiday seasons are always promotional, so I don’t expect there 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 - Sanford Bernstein

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

Karen M. Hoguet

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

And for next year, I don’t have the store count in front of me 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 inventories are very clean heading into the fourth quarter? Just give us a sense what enabled you to deliver the original earnings guidance?

Karen M. Hoguet

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

Adrianne Shapira - Goldman Sachs

Okay, so in terms of the breakdown between gross margin and SG&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 that the upscale customer was still strong. Can you just give us an update there? It sounds 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 reading with that customer.

Karen M. Hoguet

Bloomingdale’s had a good third quarter, so it’s hard to tell what’s weather, what’s other factors, so I really don’t know how to answer that, 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 that calendar 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 of America Securities

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

Karen M. Hoguet

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

Dana Cohen - Banc of America Securities

But maybe not quite as big an issue?

Karen M. Hoguet

Correct, but it’s still an issue.

Dana Cohen - Banc of America Securities

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

Karen M. Hoguet

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

Dana Cohen - Banc of America Securities

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

Karen M. Hoguet

You know, credit, our penetration continues to go up and in fact, 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 also trying to mitigate that with a collection strategy, so we’ll see as we get through the fourth quarter.

Dana Cohen - Banc of America 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 your outlook 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, then that -- my conclusion there would be then operationally, things are actually looking better than they were when you guided to this previously because there may 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 a range of estimates. If we don’t buy back the $1 billion, obviously the operations are going to have to do better to get to the same earnings. But that is part of the reason we give a range.

It’s not as precise as you all think to estimate earnings going 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 -- on some of the improving trends in the home business that you are seeing, one of the things you mentioned was the better localization of the assortments, and I’m wondering if you’d be willing to comment on where you think you are -- I think it’s three years since you centralized home. How are you feeling about that whole process? Is it something that you would contemplate at some point in the future for the rest of the division?

Karen M. Hoguet

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

Christine Augustine - Bear Stearns

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

Karen M. Hoguet

The key right now, Christine, is to get the comp store sales going and as long as we are localizing the assortment through our division structure, that’s the way we will do it. With apparel, it’s a little trickier than home, for example, so we just continue to learn and again, as long as the comp 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 - Keybanc Capital Markets

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

Karen M. Hoguet

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

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

Electronic picture frames I think will be hot, and then there’s a couple of items on macys.com that I probably should point to. One is a 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 confidence and we’ll begin to market it as we go to the fourth quarter, but I think that could be big.

And also the Rwandan basket program on macys.com continues to be important. As you know, those are hand-woven baskets and bowls that are made 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 again another example of differentiated merchandise that we are offering within Macy’s.

Jeff Stein - Keybanc Capital Markets

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

Karen M. Hoguet

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

Jeff Stein - Keybanc Capital Markets

Okay, and Martha Stewart, any sense in terms of whether or not this is driving new customers into the store? I’m wondering if you might have any statistics to share with regard to perhaps opening up new credit card accounts with Martha purchases and so fort.

Karen M. Hoguet

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

Jeff Stein - Keybanc Capital Markets

Okay. Thank you.

Operator

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

Liz Dunn - Thomas Weisel Partners

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

Karen M. Hoguet

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

In terms of your first question on geographies, the weakest geography has been the Midwest in the third quarter. That had not been the case earlier in the year in terms of the whole Midwest. And part of that relates I believe to markets where the Macy’s brand is newer and it’s taking longer to gain acceptance.

Liz Dunn - Thomas Weisel Partners

Okay, and anything in California or Florida to call out?

Karen M. Hoguet

Florida’s had a tougher third quarter than they had earlier in the year but still on an absolute basis doing okay. And California’s done fine.

Liz Dunn - Thomas Weisel 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 the markdown expenses from the calendar shift in 3Q that’s benefiting the fourth quarter margin outlook?

Karen M. Hoguet

Yeah, that’s what we had said in August when we talked about the guidance by quarter. We had said we expected the margin to be below a year ago in the third quarter and above a year ago in the fourth quarter for that reason. 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 a fantastic from a year ago when margins were up close to 200 bps. If my math is correct, if I don’t model any buy-backs in the fourth quarter, it implies about a 30 basis point decline, which if you kind of two-year stack, it looks pretty aggressive. I’m just wondering if you can give us some drivers there we should look 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’ll talk 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 and integration charges of $60 million to $70 million, I just want to make sure it does not include any expectations for future store closings.

Karen M. Hoguet

It includes what we expect to have happening during the fourth quarter.

Charles Grom - J.P. Morgan Chase

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

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 million merger/integration costs to now $210 million to $220 million in a three-month timeframe?

Karen M. Hoguet

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

Robert Wilson - Tiburon Research

Right. It just seems like such a large increase in a three-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’s going to be much harder to predict that and we are not giving guidance by quarter for that reason. Sorry.

Robert Wilson - Tiburon Research

Okay. Thank you.

Operator

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

Robert Drbul - Lehman Brothers

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

Karen M. Hoguet

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

Robert Drbul - Lehman Brothers

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

Karen M. Hoguet

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

Robert Drbul - Lehman Brothers

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

Karen M. Hoguet

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

Robert Drbul - Lehman Brothers

Okay, and then the -- you talked about the new Macy’s stores getting a little bit better. Can you maybe address the spread on the legacy Macy’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’re feeling much better about the performance of most of the May doors.

Robert Drbul - Lehman Brothers

And on the private label and/or the exclusive side of it, have there been discernible differences in the legacy Macy’s doors versus the new 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 the private brand has done very well in the former May doors as well as the legacy doors, relative to what else is in the store. So private brands have been well accepted in the former May doors.

Robert Drbul - Lehman Brothers

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 you made in the prepared section about wanting to maintain I guess access to various forms of financing, that perhaps you are referring to commercial paper and therefore commitment to your mid triple-B rating?

Karen M. Hoguet

Well, I mean, I think you sort of said it. We like access to the A2/P2 commercial paper market. And I think given all that’s gone in the credit markets, that’s probably a good thing to maintain. And therefore, we are just 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 that perhaps if your operating results came in a little softer than you are expecting, that you’d be willing to maybe apply a little bit more of your free cash flow to debt reduction to maintain your ratios to a level that the rating agencies 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 go forward.

Operator

We’ll go next to Michelle Tan with UBS.

Michelle Tan - UBS

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

Karen M. Hoguet

Well, we are doing there what we are doing everywhere, which is trying to better localize our assortments and get more of what’s selling and have 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 more differentiated product is what is selling everywhere, so we just need to continue to refine it. It will happen.

Michelle Tan - UBS

Okay, great. And then looking at the tax rate for next quarter, I know you don’t know any -- you can’t give a specific guidance number but is there any way to get a directional sense of whether it’s going to be a benefit 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 of tax rate that we would expect.

Karen M. Hoguet

You know what, I just can’t predict. I don’t expect any major deviation because remember, a $10 million adjustment in the fourth quarter wouldn’t move the needle, given the amount of operating income. The problem is in a quarter like the third quarter, which has lower operating income, these relatively small adjustments for a company our size can become meaningful 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 got out onto the Internet early. Have you done anything to modify your promotional strategy to keep the initiative in that regard? Number one -- number two, in general can you talk about your advertising spend, both in the quarter we just finished 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 our promotional 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 calendar this year is comparable to last year and when we think about the mix within that calendar, we are doing more promotionally versus brand than we did a year ago.

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 -- you gave us an interest assumption in the fourth quarter. What does that bake in for 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, and I’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 - Telsey Advisory Group

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

Karen M. Hoguet

Sure. On the Tommy subject, this is an extremely exciting initiative for us and the Tommy brand is doing very well now in our stores, and to 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 - Telsey Advisory Group

And then on the credit card?

Karen M. Hoguet

I’m sorry, on the -- interestingly, the difference between the 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 were 47%. So I think it’s really becoming a non-issue between the two.

Dana Telsey - Telsey Advisory 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 been answered, just one quick follow-up on the former May doors; is the improvement in the home business, as you’ve advertised more in those former May markets, is that really the biggest driver as you see the gap narrowing between legacy and new Macy’s?

Karen M. Hoguet

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

David Glick - Buckingham Research

Okay, great. Thanks a lot. Good luck.

Operator

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