Battling J.C. Penney
Michelle Clark – Morgan Stanley: Can you update us on the competitive environment, and specifically I know it’s difficult to quantify, but how much comp lift do you think you saw, out of Penny’s (NYSE:JCP) in this quarter, and was there any change in trend as of late?
Karen M. Hoguet – CFO: Well, I think, the key thing is in markets where we’re competing against Penny’s (NYSE:JCP), we have seen an uptick in business. To your point, it’s hard to quantify how much, but clearly we are getting a benefit from what’s happening there.
A Closer Look: Macy’s Earnings Cheat Sheet>>
Michelle Clark – Morgan Stanley: The renovation at Herald Square, that is underway, can you tell us what you saw there in terms of disruption and how big is Herald Square as a percent of total company revenue. Could it have an impact on the comps?
Karen M. Hoguet – CFO: Well, it will have an impact on the comp, but I would say it’s relatively small, and it has been considered as we’ve given guidance and planned for the year. We do think there will be disruption over the next four years. We’re obviously doing everything we can to minimize it, but there will be big chunks of square footage taken out at various points. So, it has some effect on the total, but not enormous.
Michelle Clark – Morgan Stanley: Okay. And then could you provide us with an update on what you’re seeing in terms of product cost, maybe differentiate between the first half and second half of this year?
Karen M. Hoguet – CFO: Yeah. I mean, as we get to the second half of the year, we are expecting to see some relief in terms of product costs and much like last year, we were strategizing what to do when costs are going up, we’re doing the same thing in reverse. But like last year, it’s really not until later in the third quarter where that would even begin to impact us.
Michelle Clark – Morgan Stanley: Just lastly, Karen, can you just discuss with us your appetite for buybacks? You mentioned $1.1 billion remaining in the authorization. Could you complete that this year?
Karen M. Hoguet – CFO: We have not quantified exactly how much stock we will buying back, but the idea is to use our excess cash to buy back stock. So, frankly, you’ll have to model and see from there, but there is – you get some sense in the first quarter as to our buyback intent.
Liz Dunn – Macquarie Research: Congrats on a great quarter. I guess, first question, just the inventory increase that we saw, can you just discuss and how it sort of ties into your omnichannel efforts and when we could potentially see greater efficiency in inventory?
Karen M. Hoguet – CFO: If you think about it, the inventory net of payables was up 3%. So, it’s below what we’re expecting for sales in the second quarter. So, we are funding the businesses that are doing very well so that we will be ready for May sales and beyond. I think to your bigger strategic question, I think it’s going to take us longer to figure out where is the optimal place category by category to keep inventory. So, I think that is probably at least 2013 and perhaps longer before we’ll see the impacts from major strategic changes and inventory as a result of omnichannel.
Liz Dunn – Macquarie Research: Do you think that the strategies that you’ve implemented already are adding greater inventory availability online? Are we already seeing that piece of the benefit because you seem to specifically talk about greater efficiency in sales per square foot?
Karen M. Hoguet – CFO: Well, what we’re – I’m trying to think about the end of your question, sorry. But as we’ve been adding more and more categories online that are available to be fulfilled from the store when they run out, we are seeing that there is a big opportunity to increase demand. In other words, at Macys.com we may not have been buying enough inventory to satisfy the demand that was out there. So I think that’s going to help significantly. I’m not sure I understand the quarter though on the store.
Liz Dunn – Macquarie Research: Well, you talked in our prepared comments about greater efficiency – inventory and greater efficiency in sales per square foot. So, it sounded to me like you were talking more about an ability to be more in stock in store, but I was wondering if the piece of it that was online had already benefited because you are already doing some door-to-store?
Karen M. Hoguet – CFO: No, that’s just beginning and there is one more piece to this strategy, the omnichannel strategy that we’ll begin to test this fall, which is today there are big chucks of inventories that are in the store that are unavailable online. We’ve never sold them at Macys.com because there wasn’t a good use of warehouse space, but what we are going to start experimenting with is putting merchandise up on Macys.com that you can buy that will be a 100% for sales from the store, which I think is going to be hugely successful. When I talk about the store spacing more productive, that’s in many cases taking advantage of an opportunity to perhaps take some inventory off the floor, use the direct warehouses, and broaden the assortment that you are offering the customer on the store as opposed to using that space for inventories. There is lots of things we’re thinking about category-by-category of how can we use the square footage better, where should we have inventory, how much inventory, it’s really very, very exciting.
Liz Dunn – Macquarie Research: Then one final one, just I want to understand the guidance. So is it fair to assume that the third quarter earnings would be down year-over-year?
Karen M. Hoguet – CFO: We are not giving guidance by quarter, but clearly having a $40 million to $45 million number to come up again, is going to put a lot of pressure there.