Macy's Management Discusses Q4 2011 Results - Earnings Call Transcript

Macy's (M)

Q4 2011 Earnings Call

February 21, 2012 10:30 am ET

Executives

Karen M. Hoguet - Chief Financial Officer

Analysts

Deborah L. Weinswig - Citigroup Inc, Research Division

Lizabeth Dunn - Macquarie Research

Steven J. Kernkraut - Berman Capital Management LP

Dana Lauren Telsey - Telsey Advisory Group LLC

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

Adrianne Shapira - Goldman Sachs Group Inc., Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Paul Swinand - Morningstar Inc., Research Division

David J. Glick - Buckingham Research Group Incorporated

Jeffrey S. Stein - Northcoast Research

Joan Payson - Barclays Capital, Research Division

Presentation

Operator

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Good morning, and welcome to Macy's Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to your host, Karen Hoguet. Please go ahead.

Karen M. Hoguet

Great. Thank you. Good morning. I'm Karen Hoguet, CFO of Macy's, Inc. And on behalf of our company, I'd like to welcome you to our conference call scheduled to discuss our fourth quarter earnings. 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.

2011 was another record year for Macy's, Inc. We are very proud of our team and the momentum we have built up. Our sales grew approximately 5% in comp stores for the second year in a row while increasing the profitability of the company. This results from the combination of great strategies and terrific execution, which has helped us to gain market share.

Our EBITDA rate as a percent of sales increased 80 basis points in 2011, on top of last year's 100-basis-point increase. And we have strategies to increase it further to the 14% to 15% targeted level while continuing to invest in driving top line sales.

We also increased our return on invested capital by 230 basis points in 2011, almost reaching 20%. And our return to investment grade ratings in all agencies speaks to the strength of our balance sheet, our performance, and the sustainability of our strategy. It is great to be entering the new year with so much positive energy throughout our organization.

I will outline the key aspects of our fourth quarter and the full year 2011 performance and then discuss some of our key assumptions for 2012. Sales in the fourth quarter were $8,724,000,000, up 5.5% over last year. And on a comp store basis, our sales in the quarter grew 5.2%.

Sales in the fourth quarter exceeded our expectations, reflecting a very strong holiday performance. Our sales performance continue to be balanced. We were pleased with our performance at Macy's, as well as at Bloomingdale's, online and in stores. In fact, all regions across the country produced sales growth this year for both the quarter and the full year. All year long, our southern regions across the country performed best, and that continued in the fourth quarter. And the northeast also had strong sales growth in the fourth quarter.

By family of business, we saw strength during the quarter in so many categories, including cosmetics and fragrances, shoes, handbags, watches, men's, textiles, housewares and furniture. And the areas with the most notable weakness in the quarter were the cold weather merchandise areas, junior's and traditional casual women's apparel. Average unit retail in the quarter was up 9%, while transactions were up approximately 1%, and units per transaction down approximately 4%.

For the second half of the year, our average unit retail was up approximately 7%, which is at the high end of the 5% to 7% that we had anticipated. All in all, we did a great job anticipating and planning for the merchandise cost increases that we had experienced.

Gross margin in the fourth quarter was 41%, down 30 basis points from last year. Merchandise margins were flat in the quarter, while we were negatively impacted by the free shipping as expected. Inventory at year end was up 7.5% over a year ago. This is a little higher than the 6% to 7% we had expected due to the decision to keep cold weather merchandise in the stores longer than usual so it would be available for the customer when the weather has historically turned coldest. While you might not know it on the East Coast, winter isn't over yet. And by the end of the first quarter, this merchandise will be gone, and our cost store inventory will be again below expected sales growth.

Also, remember the year-end inventory continued to be impacted by the higher in-transit discussed each quarter in 2011. We've now year-rounded on the change so it will no longer be a factor as we enter 2012.

In the fourth quarter, SG&A in dollars was $2,314,000,000, or 3% over last year. As a percent of sales, it was 26.6%, down 60 basis points from a year ago. This is better than expected due to various year-end adjustments and lower depreciation relating to the timing of capital expenditures.

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