Macy’s, Inc. (M)
Q2 2010 Earnings Call Transcript
August 11, 2010 10:30 am ET
Karen Hoguet – CFO
Deborah Weinswig – Citi
Bob Drbul – Barclays Capital
Dana Telsey – Telsey Advisory Group
Adrianne Shapira – Goldman Sachs
Wayne Hood – BMO Capital Markets
Mike Shrekgast – Longacre
Jeff Stein – Soleil Securities
Bernard Sosnick – Gilford Securities
Lorraine Hutchinson – Bank of America/Merrill Lynch
Ken Stumphauzer – Sterne Agee
Chris Cuomo – Morgan Stanley
Charles Grom – JPMorgan
Michael Exstein – Credit Suisse
David Glick – Buckingham Research Group
Virginia Chambless – J.P. Morgan
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Good morning, and welcome to Macy’s Incorporated second quarter earnings release conference call. Today’s call is being recorded. I would now like to turn the call over to your host, Karen Hoguet. Please go ahead, ma’am.
Thank you. Good morning and welcome to our 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 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 very pleased with our results in the second quarter. We exceeded our expectations in all key components of our performance; sales, gross margin, SG&A, and cash flow. This demonstrates the benefits of our strategic initiatives at Macy’s and reflects the continued strong performance at Bloomingdale’s. The key initiatives at Macy’s include the new centralized structure and our My Macy’s localization efforts.
Sales in the second quarter were $5.537 billion, and comp store sales were up 4.9% in the quarter, which like in the first quarter exceeded our expectations. Sales were strong in most categories of business in the quarter with the only notable weaknesses in women’s traditional career apparel and young men’s due particularly to tough denim performance.
The best sales results in the quarter were in men’s driven by collections plus fashion watches, updated women’s apparel, seasonal categories like swimwear, luggage, furniture and mattresses. Private brand and exclusive product also continued to achieve terrific growth throughout the store during the quarter.
Geographically, all regions did relatively well in the quarter with the only cluster of weakness in some parts of California. On a two-year basis, the strongest regions for us were the North and the Midwest, both of which were original My Macy’s pilot regions. Chicago has been particularly strong. We find this to be very encouraging and demonstrates the ongoing benefits of the strategy. Year-to-date, all 69 of our districts were at or ahead of expectations. This widespread success is very encouraging.
Our Internet businesses continue to grow rapidly, and we are developing strategies to further accelerate their growth, including in the realm of mobile. Both macys.com and bloomingdales.com are showing how important they are for driving store traffic in addition to producing great growth of their own. We now have the capability in all Macy’s stores to access the dotcom inventory to satisfy a customer. We are finding tremendous excitement for this amongst both our store associates and our customers.
Bloomingdale’s also produced great sales this quarter and continued to outpace its peer competitors. The focus of Bloomingdale’s has been on relationship selling as well as the leverage of store inventory across all of their stores, both of which helped to contribute to the strong performance of the company.
Gross margin in the second quarter was 41.9%, up from last year’s reported margin of 41.5%. Remember, though, that the accounting change related to sales to third-party retailers negatively impacts gross margin comparisons versus last year. On an apples-to-apples basis, assuming these changes had been effect last year, we achieved 90 basis points of improvement, which is really terrific. This points to the benefit of strong sales and well controlled inventory.
We ended the second quarter with inventory about flat versus last year, which we believe positions us very well for the fall season. The My Macy’s approach has clearly enhanced our ability to more frequently have the right inventory in the right place at the right time. And the net result is stronger sales and gross margin rate.
We also did better than expected in the second quarter on the expense line. The SG&A of $1.953 billion is approximately $40 million below what we had expected at the start of the second quarter. The major variances included lower stock-based compensation expense due to a lower stock price than we had anticipated, delayed training expense, and lower marketing expense.
Some of the positive variances are timing-related and will be reversed in the fall. These shifts will be included when I discuss the assumptions for fall expense. But even with these timing shifts, we were very pleased with our SG&A performance in the quarter as well as the first half of the year. Compared to last year, SG&A in dollars was up 4.9% as reported and up 3.6% had the accounting change been in effect last year.