Karen Hoguet - CFO

Deborah Weinswig - Citi Stacy Turnof - Merrill Lynch Michelle Clark - Morgan Stanley Jennifer Black - Jennifer Black & Associates Adrianne Shapira - Goldman Sachs Michelle Tan - UBS Dana Cohen - Banc of America Securities Christine Augustine - Bear Stearns David Glick - Buckingham Research Bob Drbul - Lehman Brothers Teresa Donahue - Neuberger Berman Dana Telsey - Telsey Advisory Group Charles Grom – JP Morgan Jeff Stein - KeyBanc Capital Liz Dunn - Thomas Weisel Steve Kernkraut - Berman Capital Rob Wilson - Tiburon Research Tom O'Neill - Barclays Erik Mace - Basso Capital Virginia Chambless – JP Morgan Virginia Genereux - Merrill Lynch

Good morning and welcome to the Macy's, Inc. second quarter earnings release conference call. I would now like to turn the call over to your host, Karen Hoguet. Please go ahead. Karen Hoguet: Thank you. Good morning and welcome to the Macy's, Inc. conference call scheduled to discuss our second quarter earnings, which we released earlier this morning. 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 will go through a lot of numbers this morning, but it all boils down, I believe, to three key messages. The first, we are not happy with our performance in the second quarter. As you know, we had hoped that our sales would have been stronger. Two, having said that, trends in the later part of the quarter in home-related merchandise and the former May Company doors give us reason to be optimistic that we can improve the sales trend in the back half of the year. On the other hand, the third message is that the economic environment is feeling more challenging than we had anticipated at the beginning of the year. We have tried to reflect both this optimism as well as our concerns in the guidance we're providing today, but obviously this is hard to predict. Sales during the second quarter were approximately $5.9 billion, falling short of our original guidance of $6.1 billion to $6.2 billion. Sales in comp stores declined 2.6% as compared to our original guidance of an increase of 1.5% to 2.5%. While our companywide sales were weak, sales at Bloomingdale's and Macys.com continued to perform well in the quarter. The upscale customer segment still appears to be strong. I don't think we know yet just how big the potential is for Macys.com. It is very encouraging. During the second quarter, we produced earnings per share on a diluted basis, excluding integration-related expense of $0.29, which was at the high end of our revised guidance of $0.20 to $0.30 but below our original guidance of $0.40 to $0.45. Last year's earnings per share on a diluted basis was $0.33 per share, excluding integration-related items as well as the gain on the sale of receivables and the tax settlement. The weak second quarter sales did result in increased markdowns and obviously then, a lower gross margin. The weakness in apparel, in particular, put pressure on our margins. We were, however, able to offset some of these negatives with reduced expense, but it was still a tough quarter. Let's talk for a minute about the improvement that we are beginning to see in those two important parts of our business, which is giving us the reason to feel more optimistic about the fall. First, the gap in the performance between the legacy Macy doors and the former May Company doors began to narrow as we proceeded through the quarter; although obviously, sales and the former May Company doors did continue to be below our expectations. The added promotions, combined with another year under our belt operating those stores as Macy's appears to be helping our business. We believe this gap will continue to narrow through the fall season, but will not disappear entirely. Second, the home categories began to see improvement in the second quarter. Throughout the quarter, business in soft home categories and mattresses were stronger. In the month of July, furniture had a great month. Additionally, while Martha Stewart products just began to be on our floors in any quantity toward the end of the quarter, the early sell-throughs are very encouraging. Interestingly, 35% of our bridal registries in July included Martha Stewart products, and that was without the full assortments on the floor. This demonstrates to us that customers identify with the brand, like the product offering and understand the incredible value that it offers. With this overall home trend change, as well as the early selling of the Martha Stewart product, we are feeling better about the outlook for our home business than we have in a while. Offsetting some of that optimism, however, is our belief that customer demand is less strong than expected. This headwind will make it harder to achieve our goals, but hopefully won't prevent us from doing so. The economy in Florida appears to have weakened dramatically, hurting our business there in both Macy's and Bloomingdale's stores. In the second quarter, our recurring gross margin rate was 40.5%, which is down 160 basis points versus last year. As you know, we are very disciplined in keeping our inventories current by taking markdowns on slow sellers. Therefore, we did take a lot of markdowns to clear the slow-selling inventory, but ended the quarter with inventories in very good shape. I should also mention that we did achieve a great recurring gross margin rate last year that was 80 basis points over the prior year. SG&A in the second quarter was million, $2.038 billion or 34.6%. This is a decrease in dollars of 3.7% and a reduction in rate of 70 basis points. We are very pleased that we were able to offset some of the impact of the lower sales and lower gross margin by reducing expense in the quarter. Depreciation and amortization included in that number was $327 million. We benefited in the quarter from the realization of additional synergies versus a year ago, particularly in the areas of logistics and advertising. Remember, a year ago, we had not yet changed the names and still had duplicate advertising running. We also benefit in the quarter from lower retirement expense. These expense reductions were offset in part by higher depreciation, higher direct-to-customer expense as we brought the new Portland, Tennessee facility online, as well as lower credit income, since we owned part of our receivables last year for most of the quarter. As we enter the third quarter, we will year-round the achievement of most of the synergies, so this rate reduction will be much harder to achieve. Operating income in the quarter, excluding the integration-related costs as well as last year's gain on the sale of receivables, was $347 million or 5.9%, down $61 million or 90 basis points as a percent to sales versus a year ago. May integration-related costs in the second quarter were $97 million. This compares to last year, when we incurred $43 million of integration-related expense and $134 million of inventory valuation adjustments. For the first half of the year, we have incurred integration costs of $133 million, and we think we will incur approximately an additional $17 million to $27 million in the second half of the year, for a total for the year of approximately $150 million to $160 million. This is a bit higher than our original expectation of $100 million to $125 million in integration-related costs. Interest expense was $137 million in the quarter. This is a little higher than we expected, due to the lower cash flow and accelerated buyback program. Remember, last year in interest expense, we booked an offset of $17 million resulting from a tax settlement. Taxes were $39 million in the second quarter, benefiting from normal-course adjustments and settlements. Remember that last year in the second quarter, we booked a tax settlement that benefited tax expense by $80 million and in total, between the tax benefit as well as the interest expense reduction, this settlement benefited our results by a total of $90 million after tax or $0.16 per share. Average share count on a diluted basis during the second quarter was 458 million shares, down over 18% from a year ago. During the second quarter, we bought back 23.8 million shares for $928 million in the open market, with an average price of $38.95. We continue to believe our stock represents a great value, particularly at current prices, and therefore we will continue our buyback program as expected. When combined with the accelerated share repurchase completed in June, we have bought back a total of 69.5 million shares this year or 14% of our beginning of year basic share count. Our remaining authorization is of $1.25 billion approximately, which we expect to utilize this year. Diluted earnings per share, excluding the May integration-related costs, as I said earlier, was $0.29 versus $0.33 last year excluding integration-related costs, the gain on the sale of receivables and the tax settlement. Cash flow from continuing operating activities in the first half of the year was $412 million, as compared to $2.281 million last year. You will recall that last year included the sale of receivables for $1.86 billion. Excluding the sale of receivables, cash flow from continuing operating activities a year ago was $421 million. Cash flow from continuing investing activity was an outflow of $350 million this year, as compared to an inflow of $240 million last year, due to the sale of the Visa portfolio as well as the higher than usual asset dispositions of $443 million resulting from the duplicate properties. This year, we benefited in the first half of the year by $66 million from the sale of After Hours as well as asset sales, which continued to be higher than normal of $71 million, again related primarily to the sale of duplicate properties and facilities. The key items in cash flows from continuing financing activities are the $2.9 billion in stock buyback, as well as the $2.253 billion of debt issued. $1.6 billion of this is the long-term debt raised in March, and the remaining $653 million is commercial paper which was outstanding at the end of the second quarter. Last year, we had no commercial paper outstanding. So that's a quick overview of the quarter. Let's move on to talk about our outlook for the second half of the year. As we look to the fall season, we are somewhat optimistic. We believe we are headed in the right direction, and as I said earlier, this optimism is tempered somewhat by concerns about the health of the consumer. We do believe, however, that we have the ammunition to perform better than we have year-to-date, and our organization is really focused on delivering these expectations this fall. Our guidance for the back half of the year is being lowered somewhat relative to the original guidance, given both our year-to-date trend as well as our concern about the economy; but remember, it does reflect improvement versus where we have been in the first half of the year. We are now assuming comp-store sales of minus 1% to plus 1% in the third quarter and comp-store sales of flat to up 2% in the fourth quarter. This translates to total sales assumptions of approximately $5.9 billion to $6 billion in the third quarter and $8.8 billion to $9 billion in the fourth quarter. In terms of earnings as you saw in our press release, we are now expecting earnings in the third quarter of $0.05 to $0.10 and $1.70 to $1.80 in the fourth quarter. Because of the fiscal calendar shift this year and the resultant timing of taking clearance markdowns, our gross margin and therefore our earnings are lower than one might have expected in the third quarter, and higher than one might have expected in the fourth quarter. We are assuming a decline versus a year ago in our gross margin rate in the third quarter and an increase in the fourth quarter. So for the second half of the year as a whole, we are assuming the gross margin to be flat to up slightly, but again expecting a decline in the third quarter. We're expecting SG&A to increase in both dollars and rate this fall, as we year-round on the achievement of the synergies. This is our assumption in both the third and the fourth quarter. Depreciation and amortization is expected to be approximately $330 million in Q3 and $335 million, roughly, in fourth quarter. Interest expense is now assumed to be approximately $150 million in the third quarter and $140 million in the fourth quarter. So, as we approach the one-year anniversary of our Macy's nationwide brand launch on September 9, it is safe to say that we have learned a lot over the past 12 months. The financial results so far this year have not been as strong as we originally envisioned, but we do believe we have a good understanding of the remaining issues and a full appreciation of the future opportunity, which we continue to believe is substantial. As always, we appreciate your interest in Macy's, Inc., and at this point, I'll now open the call up for your questions.

Your first question comes from Deborah Weinswig - Citi. Deborah Weinswig - Citi: I was very impressed with your SG&A performance in the quarter, in light of what happened on the top line. You talked through logistics and advertising as being two areas of additional synergies. Can you also talk about any actions taken during the quarter to really focus on reducing expenses in light of a weaker top line? Karen Hoguet: I think, as you know, Macy's and obviously Federated before that has always been very focused on watching our sales line and reacting in terms of inventory receipts as well as expense. Our managements throughout the company did a fabulous job of doing that throughout the second quarter. Deborah Weinswig - Citi: Also, on the Internet side, I know that obviously the company had made some investments to bring up the Internet to speed with regards to some of the competition. Can you talk about has there been anything around additional advertising to let your customers know that you are more multi-channel than you have been historically? Or what do you think has really been driving traffic and obviously ticket as well? Karen Hoguet: Actually, contrary to what you say, I think the website has had the technology to be very competitive relative to the competition for quite a while, and what we have done is basically built off the increase in the Macy's brand name, obviously a huge benefit of having converted all the May Company stores to Macy's a year ago. The merchandising just keeps getting better, the fulfillment is better. Obviously, with the opening of Portland, we're very excited about some of the technology we're bringing online. But I think it's really a combination of customers liking the multi-channel shopping. Many customers now come in the stores, buy online or, vice versa, shop online, come in the stores. I think that multi-channel experience is only going to get more important as we go forward. Deborah Weinswig - Citi: The reason I had asked about the functionality is I know that there's been an increase in investments. Has that been more to raise awareness, or has that been to also improve functionality of the website? Karen Hoguet: Most of the investment has been on the functionality and also on the distribution side, just to make it more efficient as it we have gone forward. We are marketing more, but it has really been more making the experience even better from the customer prospective. Deborah Weinswig - Citi: Are you seeing your existing Macy's customers are also cross-shopping, or are you also getting a new customers? Karen Hoguet: Yes, yes and yes. Deborah Weinswig - Citi: Great. So it's positive all around? Karen Hoguet: It is.

Your next question comes from Stacy Turnof - Merrill Lynch. Stacy Turnof - Merrill Lynch: I wanted to get a little bit more clarification on your comments on gross margin. Given your guidance, we can see that there's a notable decline being forecast in gross margin in the third quarter. But it seems like fourth quarter, either you have a little bit more optimism that your going to see a rebound; and with the additional clearance week in January, I would have expected that to be a somewhat negative impact. So if you could walk us through the differential and give us some more details there, I would appreciate it. Karen Hoguet: Interestingly, as we began to study the calendar shift better as we proceeded through the year, our internal plan from the one we had in February to now saw a big decline in the third quarter margin and an increase in fourth quarter. As we talked to the divisions as to why that was happening, most of it really did relate to the calendar, which negatively impacts the third quarter and helps the fourth quarter. So I think that's what's driving it more than anything. Stacy Turnof - Merrill Lynch: So is it a different type of mix that's driving it? Karen Hoguet: No, it's just that you're taking the markdowns the same calendar week as a year ago, but it ends up in a different quarter this year. Stacy Turnof - Merrill Lynch: My next question is given a slightly optimistic outlook, if you had to sort of rank whether it's a rebound in the May division, home area or apparel, what is really driving your optimism? Karen Hoguet: Frankly, it's all three.

Your next question comes from Michelle Clark - Morgan Stanley. Michelle Clark - Morgan Stanley: Can you just discuss for us the merger-related integration costs for fiscal year 2007? Initial guidance was $100 million to $125 million. Obviously now that has come up to about $150 million to $160 million. Can you just discuss what's driving that increase, specifically? Karen Hoguet: It's not one item. There's a series of probably 20 or 25 things that we are now doing that we had not anticipated as we've gotten in further. So it's not any one major strategy. Michelle Clark - Morgan Stanley: Your thoughts on asset securitization? Obviously, you guys own about 54% of your real estate. Any thoughts there? Karen Hoguet: I'm not sure what the question is. Why would I securitize the assets? Michelle Clark - Morgan Stanley: To receive value if you could lever up against those assets? Karen Hoguet: The reason I'm hesitating is because it's obviously cheaper for us to do unsecured debt. So I'm not quite sure why we would do that. Michelle Clark - Morgan Stanley: So you would go with the unsecured debt versus securitizing those assets? Karen Hoguet: Currently, that would be the case. Michelle Clark - Morgan Stanley: Just to get into the comp guidance for the back half of the year, it does assume an acceleration to the first half. Obviously, a very difficult macro environment, as well as more challenging comparisons for you guys. What specifically is driving that optimism? Home is still a relatively small percent of total sales. Karen Hoguet: Well, a couple things I disagree with what you said. We don't think it's a very difficult economic environment; more difficult than we had anticipated, but not as bad, at least for now, as what you're saying. Secondly, the comparisons are tough on the legacy doors. But that's not the case on the May doors, so that helps drive comps this fall. Thirdly, we have seen a narrowing in the gap, and the May doors have been performing better. So we think that will help us as well, as the Home business is doing better, and with the launch of Martha Stewart, we are optimistic. Michelle Clark - Morgan Stanley: So the assumption assumes that the narrowing of the gap between the legacy and the new May doors continues through the third quarter? Karen Hoguet: Correct, through the fall season.

Your next question comes from Jennifer Black - Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: I have two questions. I wondered if you could talk about what you're seeing for back to school in your young men's and your junior departments? Any comments on the performance of your INC brand? Then what regions are the May doors performing the best, and what regions are performing the worst? Karen Hoguet: Hopefully, I'll remember all three of them. On back to school, we have actually had a pretty good quarter, particularly in kids as well as juniors and young men's, but that started off well. INC has done relatively well in the first half of the year compared to the national brands, and we continue to obviously feel very good about that. In terms of the regional differences, there really has not been one, contrary to what a lot of people seem to think.

Your next question comes from Adrianne Shapira - Goldman Sachs. Adrianne Shapira - Goldman Sachs: You had just called out that you're seeing improving sales trends in former May doors. Can you shed some light in terms of traffic trends, I know that had been the culprit, and ticket? Particularly drilling down into the acceptance of private label at those doors? Karen Hoguet: Well, the acceptance of private label in those doors has been good all the way through, not as good as we had expected, but good relative to market brands. So that is continuing to happen. In terms of traffic, obviously, it has to be getting better if the sales there are getting better. So we think that that's helping, and probably driven in part by the added promotion. Adrianne Shapira - Goldman Sachs: Are you seeing big spikes in traffic when the coupons launch and then peter off, or is it starting to build even when the couponing dissipates? Karen Hoguet: As you know, we don't measure traffic specifically. So we can tell what's happening with the business overall. It's behaving as we would expect it to. Adrianne Shapira - Goldman Sachs: Could you give us a sense, given the increased couponing, how much we should think the pressure going forward, you explained the shift, but how much of the pressure on the margins is because of a change in now greater couponing going forward? Karen Hoguet: Not a lot because, again, if you planned promotions they don't have to be unprofitable. What hurts you on the margin line is when sales are weak and you have to clear goods. The planned promotion often can get worked into a gross margin plan.

Your next question comes from Michelle Tan - UBS. Michelle Tan - UBS: I was wondering if you could give us any more color on specifics about the marketing changes that you have been able to make so far? Is that what you would attribute the primary driver to of the closing of the gap between the May stores and the legacy Macy's stores? Karen Hoguet: I wish I could be specific as to what's causing the reduction or the narrowing of the gap, because if we could, we would do more of it. I clearly think that's a piece of it, but I also think more time operating the stores has helped tremendously. I think the assortments get better and better, so I think it's really a long list of things helping to narrow that. But I do think the promotional increase is a big part of it. So far, the promotional increase has been less in the advertising and more just in events and coupons. As we go into the fall season, you will start to see more promotional advertising than we would have done had we continued on the spring course. We think it's more compelling, creates more urgency. It doesn't mean, by the way, you're not going to still see brand advertising. We want to walk and chew gum. But the mix will be more towards promotional than it has been in the spring, but we will continue to also build the Macy's brand, which we think is very important long term. Michelle Tan - UBS: So when we look at the guidance for the third quarter, you mentioned that you were exiting with inventories in a pretty good place going into the third quarter. Is part of the reason the margins are planned down because you are planning to step up the couponing again and markdowns? Karen Hoguet: No, it really isn't. Again, as we look at the fall season, it's more normalized. But the calendar shift caused the margin to good down in the third quarter and up in the fourth, so there's really not a big impact of that. Michelle Tan - UBS: The improvement that you saw in Home, is it possible to attribute any of it really to Martha Stewart, or is it just too early and it more seems to be a result of promotions in that category? Karen Hoguet: Well, I think it's too early to attribute it to Martha, which, by the way, is the good news, because then that would be additive to the trend. I think it's partially the promotion. I also think it's partially the assortments and the execution in the store and the better link between merchandising and marketing which is, I think, allowing us to drive the business more effectively than we have been doing.

Your next question comes from Dana Cohen - Banc of America Securities. Dana Cohen - Banc of America Securities: In terms of the promo in the back half of the year, I just wanted to make sure I understand the strategy. You clearly increased promo versus planning in Q2, but as we lap into Q3-Q4, is it flat versus LY, up to LY, what should we be thinking about that? Karen Hoguet: It's essentially flat versus LY. Different markets are slightly different, because we are promoting, there's more couponing in the former May markets than in the legacy Macy markets, so there's not a straight answer. But on average, it's about the same as a year ago in terms of couponing activity. Dana Cohen - Banc of America Securities: In terms of the gross margin guidance Q3, Q4, the shifting week is that first week of November? So basically what you're saying is that's a very highly promotional week shifting. Karen Hoguet: No, no, no. A lot of clearance markdowns get taken. If it were promotional, you would get the sales at the same time. Dana Cohen - Banc of America Securities: Okay, got it. Karen Hoguet: Remember, when you take a clearance markdown, you mark down the entire inventory of that item. So you don't get the sales until the next month or later in the month. Dana Cohen - Banc of America Securities: Okay, I get it. Then here's what I'm struggling with on the SG&A. In the first quarter of last year, you didn't get any of the synergy savings, and then they started to ramp in Q2. So, all things being equal, SG&A dollars should have been down less in Q2 than they were in Q1. So, given that they were down more, I guess I don't understand the performance in Q2 and then saying it will be up in Q3, Q4. Karen Hoguet: Well, the second quarter implies that as the business weakened as much as it did, we took action and cut expense. So that's good. As you go to Q3 and Q4 as I said, the synergies are pretty much behind us at that point, and we are trying very hard to protect the business as we go into the fall season. So if sales are worse than what we're guiding, we may in fact bring the expense down more. We'll just have to see as we go. Dana Cohen - Banc of America Securities: I understand. But isn't there some still left in Q3? Because I thought you didn't get all of it until Q4. Karen Hoguet: Not much. Dana Cohen - Banc of America Securities: Lastly, on the comp issue, the May doors clearly had a tough year all of last year. But, given the comp trends, if May is getting better, obviously, the legacy Macy's doors have worsened. So are we seeing any stabilization in that trend that gives you confidence for the back half? Karen Hoguet: The big issue in the legacy doors, as you know, in the second quarter related to ready-to-wear. Home was strengthening there, as well as in the May doors, and we are feeling more confident about ready-to-wear in the fall based on some early fall selling, based on some changes that we made. Frankly, ready-to-wear had a weaker fall than they did spring of 2006. So the comparisons are a little bit easier.

Your next question comes from Christine Augustine - Bear Stearns. Christine Augustine - Bear Stearns: Are you still planning CapEx for this year to be about $1.1 billion to $1.2 billion? Karen Hoguet: Yes. Christine Augustine - Bear Stearns: Has there been any change in how you're allocating that CapEx? What I'm most interested in is remodels for the former May stores. Karen Hoguet: No change at all. We are continuing to do that. That's not a new plan. Christine Augustine - Bear Stearns: Right. But no change in how that has gotten allocated? Karen Hoguet: No, not at all. Christine Augustine - Bear Stearns: For your online business, does the home percentage of the mix match more or less the stores' mix, or is it skewed higher or lower? Karen Hoguet: Home is higher on the Internet as a percent of the store. You would expect that, because it's easier to buy online; it's harder to carry out of the store. Christine Augustine - Bear Stearns: Right. Some department stores, it's above 50%. So is it of that magnitude for you as well? Karen Hoguet: It's not, and I don't know the specific number, but I know it's not of that magnitude. Christine Augustine - Bear Stearns: Could you provide us with an update on the remaining stores that are left to sell? Is there any progress there, or will you continue to run duplicates in some of the bigger malls? Karen Hoguet: We will continue to run duplicates in some of the malls. Interestingly, the duplicates are actually performing quite well, which is sort of intriguing. But we continue to try to work with developers to get us out. So there's really no update. Christine Augustine - Bear Stearns: The only other thing on the expense cuts, is some of it payroll-related? There have been some articles about certain regions where maybe store expense has been looked at. Is that part of what you're looking at or did look at in 2Q? Would that be something you would consider for the back half? Did you cut out hours? Karen Hoguet: When sales are weaker, you always adjust payroll, or otherwise you are going to have expenses that are way higher than what you want. But we are doing everything we can to try to not cut the selling expense too far. If anything, over time, we would like to add to that line, as we find reductions elsewhere. So we would be reluctant to do so. I can't tell you it doesn't happen, but we are trying hard to find other ways of reducing expense besides that. Christine Augustine - Bear Stearns: It just seems to me, for you long term to differentiate yourself from some of the other department stores in the mall, it will be important to have a little bit more of a service model. Karen Hoguet: We agree. That's why we look for reductions elsewhere, so that we can make that happen.

Your next question comes from David Glick - Buckingham Research. David Glick - Buckingham Research: Before I get to a question on Martha Stewart, I just wanted to beat a dead horse here on Q3 and just try to clarify our understanding of this. I just wanted to double-check that the decline in the gross margin does not, in no way is in any way impacted by any carryover spring or summer markdowns? Karen Hoguet: Absolutely not. David Glick - Buckingham Research: That was my understanding. I wanted to confirm that. Karen Hoguet: Yes. David Glick - Buckingham Research: If you were to pull out the timing change on the markdowns which I assume are first markdowns on fall goods that are being delivered now and next month, if you were to exclude that from your third-quarter guidance, would earnings be relatively flat? Karen Hoguet: I haven't done it, so I don't know. Sorry. David Glick - Buckingham Research: I assume all your private brands would be a pretty big markdown that wouldn't necessarily have allowances that you could move forward to cover them? Karen Hoguet: That's all true. I just have not done that arithmetic. David Glick - Buckingham Research: A quick question on Martha Stewart. The early selling is very encouraging. Could you share with us some details of the advertising launch? The reason I ask is home store advertising typically drives traffic much more effectively than apparel and accessory advertising, and may have the potential to lift not only the home store but have some benefits to other areas in the store. Can you give us a sense for what we can see, what we will see in terms of the launch? Karen Hoguet: We obviously agree with the fact that when you drive traffic to the home, it helps the whole store. That has always been one of the great benefits of the home business, because it is so promotional, driving traffic. Mid-September, around the time that we launched the Macy's brand last year, there will be a lot of Martha Stewart advertising. A lot of it will be brand, some of it will be price-driven. We're really quite excited about what we think you're going to see then. David Glick - Buckingham Research: I know last year you did a big Shop for a Cause day. Are you going to run that event again this year? Will it be the same timing? Karen Hoguet: Can't say. David Glick - Buckingham Research: Can't say? Karen Hoguet: No, because if I say it, everyone will know. David Glick - Buckingham Research: I wanted to try to get a sense of the flow of sales. Obviously, you have given August guidance. November is going to be impacted by the shift of the first week in December into November. Can you give us any color on, in general, how you see the sales flowing through the fall season? Karen Hoguet: As we thought about September, we have all been concerned about year-rounding the brand launch, that as optimistic as we are about Martha, there was a huge amount of hoopla last year as we converted the name. So September is going to be perhaps a difficult month to forecast. As we get into October and particularly November-December, we're more optimistic. In fact, you see that in the comp guidance that we've given in terms of third versus fourth quarter.

Your next question comes from Bob Drbul - Lehman Brothers. Bob Drbul - Lehman Brothers: On the Martha Stewart business, can you just give us an idea how big you think that could be as a percentage of sales? Do you have any other new launches that you are excited about to help drive sales in the fall? Karen Hoguet: In terms of how large, we have actually not put a number on a large it will be. But we do think it will be a substantial part of our home business. By the way, some of it is not incremental; it's replacing business that we already did, that we think the Martha product is better than the offering we had had on the floor. In terms of other new launches this fall, I can't think of any that are significant. I'll go back and check, but I don't know of any huge ones, and certainly nothing of the magnitude of Martha. Martha is the first time we have ever launched a brand in all 800 doors, so it's of a magnitude we have not done before. Bob Drbul - Lehman Brothers: On share repurchase given you talked about I think 1.25 billion for the remainder of the year. Can you just give us an update on your thoughts around perhaps an accelerated buyback program with the stock at these levels, and how you might proceed with that? Karen Hoguet: Life is about balance, and we looked at all possibilities. Obviously, with the stock at its current price, it is a great value. On the other hand, we're heading into our heavy borrowing season, and we need to keep that into account as well. So we obviously look at all things and we'll continue to do so, particularly if the stock stays at this level. Bob Drbul - Lehman Brothers: On the macro side of it, given your experience and time in the industry at the company, when you look at what is happening today, what period of history do you think that the current consumer spending or economic environment most mirrors? Karen Hoguet: You know something? I don't know the answer to that. I haven't thought about it that way. Frankly, we have been so focused on the things we control that I just have not thought about it.

Your next question comes from Teresa Donahue - Neuberger Berman. Teresa Donahue - Neuberger Berman: In terms of the ready-to-wear issue, could you elaborate a little bit on what might have been the issue at Macy's in the second quarter? Also, relative to Bob's question, could we be seeing an early sign of a shift towards home and away from apparel? Karen Hoguet: I don't know the answer to that question. As we look to ready-to-wear in the fall, there are some new fashion trends that we think will be good for us. Most notably, novelty jackets and coats appear to be starting off strong. Pants with waist interest and wider legs, denim, there's a whole list of things that are looking better. Color we've done, we think, much better for the fall. We think we did not do well in the spring, and so we think we're learning, based on what has been selling and hasn't sold in the second quarter. So we do think there's reasons to be more optimistic about ready-to-wear in the fall.

Your next question comes from Dana Telsey - Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Can you give us an update on the May credit card penetration? I believe it was 44% last quarter. How is that trending? Lastly, just on the landscape of the apparel manufacturers and the changes there, with many of the brands now for sale, do you see your business taking advantage of buying any of those brands or looking at them for potential exclusives or private-label opportunities? Karen Hoguet: In terms of your second question, we do believe that having brands and having exclusive merchandise is important. So, as you would expect, we might consider some of those. Don't know the answer, but obviously it would be wrong of us to ignore what's happening in terms of the major changes. I actually don't have the May penetration in front of me; I'll get back to you. It has continued to grow by hundreds of basis points and doing very well, but I don't have the specific number.

Your next question comes from Charles Grom – JP Morgan. Charles Grom - JP Morgan: When you look at your 850-plus stores in the comp base and the second quarter comps are down 2.5%, can you give us the range for how many stores are below and above, say, 5% and up 5%? In other words, how does the bell curve look for your comp base? Karen Hoguet: I don't know it; but if I knew it I'm not sure I would disclose it. But I've not looked at it that way. Charles Grom - JP Morgan: I'm curious to how you are measuring the effectiveness of your increased ad spend, coupons, more branded advertising, et cetera. Is there a comp hurdle rate you need to hit in order to get the proper return? Karen Hoguet: Yes. As you would expect, we have a whole group of people that measure the effectiveness of all kinds of advertising, whether it be brand, which is obviously much harder to read, but also every promotional event, every ROP ad that's run, every direct-mail piece. They calculate the returns on each of them and decide which were successful and which weren't. That's just an ongoing, constant process. Charles Grom - JP Morgan: Over the past couple of months, have you been hitting that hurdle? Karen Hoguet: Well, you don't hit that hurdle on every single promotion. Some do well, some don't do well. So it's hard to give you an answer in total. We do it event by event. Charles Grom - JP Morgan: Just to circle back on an early question on the restructuring charges, can you just walk through the components of where they came from? When you look to the back half of the year, you increased your guidance. Could it come in higher? Do you expect it to potentially come in higher? Just some clarification on that front? Karen Hoguet: Well, if I thought it was going to come in higher, I would have reflected it in the guidance. The guidance reflects, no fooling, what we're really expecting. Charles Grom - JP Morgan: Then on the components? Karen Hoguet: Well, it's the normal things. It's severance and people-related issue. It's store closing-related issue. It's selling distribution centers. It's all those sorts of issues associated with the integration. Charles Grom - JP Morgan: So we should get a little bit more in the third quarter, maybe some in the fourth quarter, and that should be it on that front? Or could it linger into 2008? Karen Hoguet: No, no, no. It's it. This is it. If there's any of those kinds of costs next year, it's just part of the operation.

Your next question comes from Jeff Stein - KeyBanc Capital. Jeff Stein - KeyBanc Capital: The interest expense guidance that you provided for Q3 and Q4, does that take into consideration the accelerated share buyback? Karen Hoguet: Well, the accelerated share buyback meant that we had bought back more in the second quarter than we had anticipated. So that is included in that earnings guidance. Jeff Stein - KeyBanc Capital: In other words, the $1.2 billion that you intend to repurchase over the balance of the year, is that baked into the interest expense? Karen Hoguet: Yes, it is, on the timing that we expect to do it, but yes. Jeff Stein - KeyBanc Capital: You indicated that you would expect the gap between converted doors and legacy doors to narrow but not disappear before fiscal year end. At what point would you venture to guess that those two comp numbers will converge? Karen Hoguet: I don't know. Jeff Stein - KeyBanc Capital: Are they far enough so that it's unlikely they would converge early next year? Karen Hoguet: I think that could happen. I just haven't looked at the plan for 2008, split that way. We are trying very hard to get to one company, and not keep thinking legacy versus former May. But our expectation is that should happen soon. Jeff Stein - KeyBanc Capital: With regard to advertising spending, you did spend a lot on the rebranding launch last fall. How much of the slack will be taken up by the Martha Stewart launch? In other words, will that keep your advertising on a level playing year over year in terms of dollars spending, or will it still be less year over year? Karen Hoguet: We're expecting advertising expense to be relatively flat year over year in the fall season.

Your next question comes from Liz Dunn - Thomas Weisel. Liz Dunn - Thomas Weisel: My first question relates to your ability to impact receipts for the third and fourth quarter. Has that ability been fairly equal, so could part of the gross margin guidance be related to a better ability to impact fourth quarter receipts? Karen Hoguet: No. Liz Dunn - Thomas Weisel: The second question relates to your comments about Florida. Could you give us just a little bit more information on what you're seeing in Florida? Then, other than Florida, what are you and the management team seeing out there that makes you a little bit more cautious on the macro environment? Karen Hoguet: I think, like everybody else, we have been focused for a while on gas prices and obviously now housing, which is in small part relating to the loss in wealth relating to falling house prices. But it's also from the loss of spending stimulus coming from what's going on in the mortgage market. So it is concerning. Liz Dunn - Thomas Weisel: That's something you're seeing in Florida, or throughout? Karen Hoguet: Well, no, that's throughout. I'm sorry. In Florida, we've just seen much greater deltas. The economy had been doing so much better there, and now it's weakened. Liz Dunn - Thomas Weisel: On Bloomingdale's, Bloomingdale's continues to do relatively well. Do you think that relates to the higher-end consumer or specifically how you are executing at Bloomingdale's or both? Karen Hoguet: I think both. I think, as you see through all of the competitor numbers, the upper-end customer is doing well, which you see in Bloomingdale's also. But they are also doing a spectacular job of executing, both in their comp stores and also the new store openings have been terrific, which is obviously giving us optimism about the opportunities for new stores going forward.

Your next question comes from Steve Kernkraut - Berman Capital. Steve Kernkraut - Berman Capital: Let me just see if I can dig deeper on the May doors. In terms of the Marshall Field's, is there an improvement there as well, as you see in the other May doors? Karen Hoguet: There has been some. But as we've said repeatedly, we think that turnaround at Macy's North is going to take us longer. So I think I would continue to make that statement. Steve Kernkraut - Berman Capital: Do you think it would take a year longer? Karen Hoguet: I can't put a time to it. But we've talked about the fact that the Marshall Field's strategy was very different from the May company strategy. Steve Kernkraut - Berman Capital: In terms of Wal-Mart saying that they had such difficulty in apparel businesses, and while they don't have a huge amount of overlap with you, does that change your entry price point strategy, in terms of what you see in the Macy doors? Karen Hoguet: I don't think so. Why would it do that? Steve Kernkraut - Berman Capital: Well, it depends whether or not you thought you had to be more price promotional, whether or not you had to be more competitive, whether or not you would lower the price points on your lowest-priced children's polo shirts, things like that? Karen Hoguet: No, I don't think so.

Your next question comes from Rob Wilson - Tiburon Research. Rob Wilson - Tiburon Research: Why would SG&A be higher in Q4? I would have thought with the anniversarying the 53rd week that maybe you would have had some opportunity there. Karen Hoguet: No, that actually hurts in terms of the rates. As we had said when we gave original guidance at the beginning of the year and we reported the fourth quarter, there were a large number of year-end adjustments which are going to be very hard for us to year-round. Rob Wilson - Tiburon Research: I understand the rate issue, but you said dollars would be higher. Karen Hoguet: Right. It's still the case. Again, that's not new news. We had talked about that when we released the fourth quarter earlier this year. Rob Wilson - Tiburon Research: A year ago, you talked about the reallocation of space in your ex-May doors away from less home product. Has there been any further discussion there? Karen Hoguet: We didn't really make any major space allocations. In some cases, we did take furniture out and convert them to galleries. There was some slight space shifts, but not enormous, in the May doors. Rob Wilson - Tiburon Research: Have you thought about closing any of your furniture stores? Karen Hoguet: Well, we always look at closing furniture or full-line stores, based on the cash flows to operate going forward, relative to the cash flows to close. We will constantly look at that, as we've always done. So sure. Rob Wilson - Tiburon Research: No new strategies there, in other words? Karen Hoguet: No.

Your next question comes from Tom O’Neill - Barclays. Tom O’Neill - Barclays: Higher funding costs have come about recently in the capital markets. Can you just give me a sense, we have been seeing here not only for non-investment-grade companies but also for companies like yourself, BBB companies, higher funding costs given what is going on in the financial markets. How does this phenomenon, along with the economic environment, affect your appetite for additional share repurchases beyond the program that you've announced, or the possibility of operating at a higher leverage level, going forward? Karen Hoguet: Well, in terms of short-term borrowing costs, we did at the end of last week see some increase in rates in the commercial paper market. But that seems to have stabilized and, again, hopefully day by day, we are seeing it, but that was an issue. In terms of longer-term borrowings, at this point we'll just have to watch and see what happens. Obviously, if you talk about more aggressive buybacks, you've got to finance it some way, and you need to balance the two. Tom O’Neill - Barclays: I know you typically do not discuss such press stories as the LBO story that was in the Journal over the quarter. I know you did issue a press release saying you don't typically comment on such stories. But perhaps you could talk more generally about the change in your industry specifically. The LBO of almost 20 years ago did not work out well because of high leverage followed by a recession. Would the environment today make it easier or less easier to do a transaction, given the financial markets today versus back then or as a result of changes in the department industry since back then? For example, we have had leaders in the supermarket space say that the evolution of Wal-Mart in the supermarket space over the past 20 years has changed the structure of the industry, and it's not appropriate to do an LBO. Any comments that you could make on the changes in your industry would be helpful, with respect to this. Karen Hoguet: I don't know how to address the change in the industry comment, so I'm not quite sure how to even address your question. Tom O’Neill - Barclays: Well, anything that you could say in terms of the fixed income community? Clearly, there has been a lot of focus on the possibility of an LBO, given the article that was in the press. Karen Hoguet: I don't think there's a lot of people talking about that today. Tom O’Neill - Barclays: Okay. Well, fair enough.

Your next question comes from Erik Mace - Basso Capital. Erik Mace - Basso Capital: I want to make sure I'm interpreting this correctly. As you look at gross margin and your comments about promotions flattening out year over year relative to what it was in the second quarter, I recognize that you guided the comp down a little bit in the third quarter versus where you had been. But it sounds as though you're looking at sales stabilizing, leveling out maybe a little, despite flattening out of promotional levels. Is that a fair assessment? Karen Hoguet: Again, it's flat with a year ago. We had expected to cut promotions in the third and fourth quarter this year, and as you know, based on business trends this spring, have decided not to do that. Erik Mace - Basso Capital: So, since I don't necessarily remember what the sequential changes were a year ago, what does this mean sequentially? Karen Hoguet: Well, when we changed the names of the May doors to Macy's, we made a very dramatic cut in the couponing in those markets to equal the Macy's levels. Erik Mace - Basso Capital: That I recall. Karen Hoguet: So we will year-round on that, but we won't continue the cuts that were made in the spring. So, again, we're not swinging the pendulum the other way and suddenly increasing promotions dramatically. We're really trying to stabilize the promotional effort. Over the longer term, we will continue to reduce, but not this fall. Erik Mace - Basso Capital: As you look into the fall, just to follow onto that, then, what kind of competitive response is built into your margin plan, recognizing it's not a straight line competitive set with the Kohl's and the Penney's of the world, but what is the thought there? Obviously there are new product launches coming to the market this fall and the like? Karen Hoguet: I think we have anticipated what we think will happen.

Your next question comes from Virginia Chambless – JP Morgan. Virginia Chambless - JP Morgan: I had a couple of follow-up questions, one on the home business and the improvement that you have noted in that business. Is that category performing better than the balance of the business, or is it just less of a drag? Karen Hoguet: It varies by category, but it is less of a drag and in some cases performing better. Virginia Chambless - JP Morgan: My other question was on the share purchases you plan to do over the balance of the year. Will you fund those from free cash flow, or is that how you anticipate to fund those? Karen Hoguet: It will be commercial paper and free cash flow.

Your next question comes from Virginia Genereux - Merrill Lynch. Virginia Genereux - Merrill Lynch: How far do you think you guys can go in private label? I'm less interested in a number than I am your ability to execute private label. Is it limitless, or is there a point at which you can't come up with the incremental creativity? Karen Hoguet: It's not limitless at all, and what we have said is that private brand last year was about 18% and we think that it could perhaps grow to 20%. But what we're really focused on is getting exclusive or limited distribution product, not just private brand. So, for example, Martha Stewart is not private brand, but we would love to have more Martha Stewart-like products in our store. In fact, Martha replaces some private brand, bringing that percentage down. So our focus is less on building private brand, per se, and more on getting more exclusive, more limited distribution, wherever it can come from. Also, obviously, we like the market brands. We will not be a store that's 100% private brand, by any stretch. So again, the number we focus on is around 20%. Virginia Genereux - Merrill Lynch: Where are you, may I ask, in limited distribution product? Karen Hoguet: It's about a third of the store would currently fall into that category of exclusive-like merchandise. We would like to tick that up somewhat, but we really believe in the market brands when they do well. We'll do everything we can to try to find new brands, nurture new small brands, try to help them do business with a company as big as Macy's, because we need that newness. Virginia Genereux - Merrill Lynch: Yes, which is a great segue. Today are smaller vendors better able to service you, given advances in technology, software, et cetera? Or are larger vendors still advantaged in that regard? Karen Hoguet: Well, I think that it's probably easier for larger vendors, just given the sheer size of our company. However, we do spend a lot of time working with new small vendors who may not have the natural capabilities and try to help them. When we see good product, we will find a way of doing business with them.

That brings us to the end of our question-and-answer session, Ms. Hoguet. Karen Hoguet: Thank you, and thank you all for your interest in Macy's. Have a good day.