Karen Hoguet - Chief Financial Officer

Bernard Sosnick - Gilford Securities Inc. Dana Telsey - Telsey Advisory Group Rob Wilson - Tiburon Research Group, Inc. Paul Swinand - Morningstar Inc. Michelle Clark - Morgan Stanley Robert Drbul - Barclays Capital Adrianne Shapira - Goldman Sachs Group Inc. Kenneth Stumphauzer - Sterne Agee & Leach Inc. Wayne Hood - BMO Capital Markets U.S. Deborah Weinswig - Citigroup Inc Jeffrey Stein - Ticonderoga Securities LLC David Glick - Buckingham Research Group, Inc. Lorraine Hutchinson - BofA Merrill Lynch

Good morning, and welcome to Macy's Inc. 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.

Good morning, and welcome to the Macy's conference call scheduled to discuss our second quarter earnings and our outlook for the remainder of the year. I am Karen Hoguet, CFO of the company. Any transcription or other reproduction of the statements made on 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. You haven't been hearing much positive news about the economy so far this week, but I think we at Macy's have a very good story to tell about the last 3 months. And our outlook for the remainder of the year reflects the optimism we feel about the direction of the business as well as realism about the macroeconomic environment. As you saw, we produced a 57% increase in earnings per share in the quarter, well ahead of our expectations. The 2 major factors driving this strong performance are first and foremost profitable sales growth; and secondarily, the improvement in our credit performance. When we started the year, we had expected comp store sales growth of 3% for both the first half and the full year of 2011. Having achieved in excess of a 5% comp store increase in the first half of 2010 and with concerns about the economy, we thought 3% would represent good performance. However, we were able to exceed the 3% expectation by a wide margin and produced a comp store sales gain in the first half of the year of 5.9%. This result also compares very favorably to our peers. Our strategies are clearly working, and we continue to believe that our My Macy’s structure and approach to localizing our offering are giving us a significant competitive advantage. In addition, our omnichannel strategy and MAGIC Selling program are also helping us to accelerate our sales trends. In the second quarter, we produced sales of $5,939,000,000 or a comp store increase of 6.4%. All Macy's regions exceeded last year and at least achieved plan in the second quarter. We are producing our strongest sales trends across the south and in the major tourist areas such as New York City, downtown San Francisco, Miami, Las Vegas, Orlando, Hawaii and Chicago. The Bloomingdale's business continues to be very strong as well and compares favorably to our upscale competition. The Internet with our omnichannel strategy is continuing to produce terrific results with a 40% sales increase in the second quarter. The interaction between our stores, the Internet and mobile devices is making it harder and harder to really distinguish between store sales transactions and Internet sales transactions. We are reporting the sales where the customers buy but we know that customers are sometimes shopping in the stores and then going home and ordering online, while other times, the reverse is done. Having multiple channels and focusing on an integrated strategy for all is really important for driving our sales growth and enhancing customer loyalty. Our strongest merchandise categories in the second quarter were jewelry; watches; fashion accessories, including handbags and hosiery; cosmetics, fragrances; men's; and home. Private brand also had a good quarter led by I.N.C. We had 2 very successful private brand launches this spring, Bar III for the millennial customer; and Greg Norman for Tasso Elba, a new exclusive golf line. We also continued to see strength in exclusive brands such as Tommy Hilfiger and Martha Stewart. The weak categories of merchandise continue to be within the casual traditional feminine apparel and intimate apparel. During the second quarter, the average unit retail, or AUR, increased by approximately 4%. Our customers began to feel the impact of increased prices in the second quarter, but it is not until the August-September period when we expect the price increases to be more widely experienced. It is important to remember though that some of our AUR increases result from factors other than price inflation. AUR increases occur with mix changes, resulting from the healthy sales in our status brands, new higher price point initiatives like Impulse and product initiatives that are geared to fashion versus commodity goods. Also, more regular price selling can also result in AUR increases. Combining all of these factors, we are expecting AUR increases in the 5% to 7% range this fall. Gross margin in the quarter was 41.8%, down 10 basis points versus last year due to the stronger Internet sales and the free shipping. We ended the quarter with comp store inventory up approximately 3%, which we feel positions us well for the back half of the year. SG&A in the second quarter was $1,976,000,000 or 33.3% of sales. This is up in dollars 1.2% over last year but down 190 basis points as a rate to sales versus a year ago. This is better than expected due primarily to the continued good news on the strength of our credit portfolio. In the quarter, credit produced approximately $57 million more income than last year. We had expected improvement but not this much. As in the first quarter, the portfolio experienced the big improvement in delinquencies and losses. Proprietary penetration or use of our proprietary card was essentially flat during the quarter versus last year at 46.8%, which is also better than we expected. Offsetting this benefit from credit, as well as the $20 million reduction in depreciation and amortization, was 3 main factors: one, an investment in selling expense to drive our sales growth; two, investment in our omnichannel strategy, including the costs associated with our store-to-door strategy; and three, stock-based compensation, which increased $18 million over last year in the second quarter. Operating income in the quarter was $506 million, up 37% over last year. And as a percent of sales, operating income was 8.5%, up 180 basis points over a year ago. Interest expense was $111 million, down $19 million from last year. Tax expense was $154 million, leaving net income of $241 million. Average diluted share count was 434.6 million shares and earnings per share was $0.55 per share, up 57% over last year's $0.35 per share. Net cash provided by operations was $587 million, up just short of $300 million over a year ago. As you saw, net income was up $202 million explaining much of the variance. In addition, we made $100 million lower pension contribution this year as compared to last year. These were offset in part by inventory, which was $172 million unfavorable to a year ago, offset though by $109 million of higher payables. So the net additional use of cash for inventory was $63 million. You heard me refer to inventory net of payables. I did this because we executed a strategy this year to have new merchandise arrive in stores across the country closer to the same day than what happened previously. This was actually one of the changes we made in response to a My Macy's sales getting opportunity that the new team identified. The result of this though is a large increase in in-transit inventory at the end of the month as our receipt flow during the course of a month becomes more concentrated in the first week. In-transit, as you know, is completely offset in payables so there's no impact on cash flow. And at the end of the second quarter, inventory was up 6.8% but net of merchandise payables, it was up 3.5%, just slightly above the comp store inventory increase. The key here though is that factoring out variations and ship dates, we will continue to maintain comp store inventory growth at a level lower than comp store sales growth. Net cash used by investing activities was $222 million in the first half of the year, approximately $100 million more than last year due to the planned increase in CapEx, which includes purchase of property and equipment as well as capitalized software. We utilized less cash for financing activities this year, largely due to the fact that we repaid $247 million less debt this year. So we've ended up generating $31 million of cash in the first half of the year as compared to the use last year of $478 million. And because of our strong performance, we were able to achieve the target credit ratios that we laid out for you at the end of the first quarter. The calculations are detailed on the website. But as you recall, we had set targets for debt to EBITDA of 2.4 to 2.7. And for the rolling 4 quarters ending in July, we've achieved 2.7. And our adjusted EBITDA to interest is 6.4 for the rolling 4 quarters versus our target of 6.4 to 6.6. This is earlier than we had anticipated and now opens the door for us to consider the possibility of buying back stock this fall. However, there will not be any significant buyback until after the holiday season, which, as you know, is when we generate significant cash flow. We remain very focused on keeping our ratios within the target range and being an investment-grade company. As we look to the fall season, we are cognizant of the less-than-ideal economic backdrop, as well as the price increases coming in some parts of our business. Having said that, we have great momentum with so many merchandise categories performing well. And our initial experiences with price increases have proven to be generally consistent with our expectations in terms of unit sales. We are assuming comp store sales for the fall season of 4% to 4.5% versus our original guidance of 3% and most recent guidance of 4%. This, combined with the spring actual results, would result in an annual increase of 4.8% to 5.1%. We are expecting annual earnings per share of approximately $2.60 to $2.65 for the full year or for the fall season, $1.74 to $1.79. This guidance excludes any benefit of any potential stock repurchased. But as I stated earlier, we would not expect the impact to be significant this fall. Also, as in prior years, we could close a few stores at the end of the year and the costs associated with these, which would be primarily noncash, are also not included in this guidance. Let me make a few additional comments that I think will relate to the fall guidance to help you as you develop your expectations for us for the back half of the year. One, comp store sales are assumed to grow by about the same percent in each of the third and the fourth quarters. In the third quarter, we are expecting to generate our biggest sales increased during the month of August, with lower growth expected in September and then in October. Two, we are expecting our gross margin rate to be down slightly in the fall season, particularly in the third quarter. This is due primarily to the impact of free shipping on the Internet and the growth in that business. Because we offered free ship during so much of the fourth quarter last year, the impact on gross margin this year relative to last year will be less during the fourth quarter. Three, while the increase in the comp store inventory is expected to continue to be below that of our sales growth, at the end of October and the end of January, the reported inventory will show a bigger increase. As discussed before, this is because of the change in how we're writing our orders regarding the ship date. We also decided to accelerate some merchandise orders from the first week of November into the last week of October. We did this to ensure that the stores can absorb the merchandise received. This shift compounds the in-transit increase and leads to an even larger expected increase in inventory at the end of the third quarter. And we're still working on the shift and the estimate for inventory at the end of the third quarter. But at this point, we would estimate it that the reported inventory could be up as much as 10% to 12% at that one point in time. Obviously, at the end of January, where there won't be any receipt shift, the impact would be much less. Four, S to SG&A. We are assuming a continued improvement in SG&A as a percent of sales in the third quarter and in the fourth quarter as we leverage the sales growth. SG&A dollars are expected to increase versus last year by a higher percentage in the fall season than experienced in the second quarter and by an even higher percentage in the fourth quarter than in the third quarter. We are expecting the improved credit income to continue into the fall season. However, this benefit is expected to be offset by many items, most of which though relate to driving the comp store sales growth. For example, the ongoing investment in the omnichannel strategy, including the store-to-door fulfillment strategy, is adding costs. And we are making an investment in our stores for the holiday period to support our MAGIC selling efforts. We are also funding resources during that very high traffic time of year to help our stores better recover after big days. Five, we are expecting depreciation and amortization to be approximately $565 million this fall and interest expense to be approximately $215 million. Six, our tax rate is still expected to be 37% for the full year even though it was approximately 39% during the first half of the year. We are expecting some state tax settlements for audits, which will result in a much lower tax rate in the quarter when they occur, which, at this point, we think most likely will be in the third quarter. And seven and lastly, we are still expecting CapEx for the year to be approximately $800 million. We remain cautious but optimistic about this fall. We can't ignore all that is going on in the world this week, but we also can't ignore the momentum we have nor the confidence we have in our strategies. We are staying focused on what we can control. Our team is working hard to maximize the opportunities from our 3 key strategies: one, My Macy's; two, omnichannel strategy; and three, MAGIC Selling. As we have said before, we continue to be in the early innings of the implementation of each of these strategies. And frankly, the more we learn and the more positive results we see from each, the more additional benefits we can envision. At a management meeting last week for our top 60 people or so, the mood was as optimistic as I've ever seen it. And while we are all very pleased with our results, we all know just how much more potential we have. The good news is that our success to date has been balanced between Macy's and Bloomingdale's, between the stores and online, across all regions of the country and across families of business. Even with the new discussion about the economy and the headwinds we all face, we have a broad range of assets to keep our business moving forward. And with that, I will take whatever questions you may have.

[Operator Instructions] Our first question comes from Michelle Clark with Morgan Stanley. Michelle Clark - Morgan Stanley: The first question, obviously, I didn't see it yet in the second quarter, reported sales number but, obviously, there's a lot of nervousness among investors about strength in the high-end consumer given recent sell-off in the market. Just wondering if you've seen anything at Bloomingdale's in terms of a slowdown in sales trends over the past couple of weeks correlated with the sell-off in the market?

I would argue: a, we have not; but, b, I think it's a little bit early to be judging. But at this point, business has continued strongly. Michelle Clark - Morgan Stanley: Terrific. And then, I was wondering if you can just discuss what you're seeing in terms of the promotional environment specifically as it relates to Macy's.

I don't think we've seen anything dramatically different than what we've experienced in prior times. Michelle Clark - Morgan Stanley: So no pickup in discounting 2Q versus 1Q?

I'm not even sure how I would answer that, Michelle, but there's no difference year-over-year. Michelle Clark - Morgan Stanley: Okay, great. And then, on the first quarter call, you had mentioned that May was off to a good start. I was wondering if you had any commentary on August. I know it's early.

Well, it is obviously early but as I just said a minute ago, vis-à-vis Bloomingdale's, we continue to be -- feel good about the business as you can see with our guidance for the fall season.

Our next question comes from Paul Swinand with Morningstar. Paul Swinand - Morningstar Inc.: My first question was, in the prior conference call, you said that you're going to be investing in certain inventory areas. I think one of the things you mentioned was outdoor furniture. I guess with the good comp in the quarter that implies that some areas accelerated turns, can you talk a little bit about what maybe you didn't invest in but that you're able to keep the sales high and turn the goods faster?

Well, our turn overall is improving as a result of the good sales and the inventory control that we're exhibiting. So really in most parts of the store, turnover has improved. Paul Swinand - Morningstar Inc.: So are you attributing all of that to My Macy's system and just taking what you have done in merchandising anyway in the soft goods category and being able to get that out faster, get better, more on target merchandise and turn it faster? Or what's the...

I think it's a combination of our offering, meeting customer and demand better and sales being stronger. Also, we have a very strong replenishment group in place that's helping in those areas. So it's really efforts across the board. Paul Swinand - Morningstar Inc.: Okay. And then, in the fall and going into the holiday, what new areas of inventory will you be investing in a similar way?

Well, I think we will continue to invest in the areas of the business that are doing so well throughout the center core, cosmetics, men's, home, et cetera. I can't think of any major new categories that are large, but we'll continue to fund the businesses that are growing. Paul Swinand - Morningstar Inc.: And then just real quick, with the talk of the inventory system that you just explained, do you see that accelerating cash flow in -- over the long term or is it just a net neutral in the next few years?

Well, inventory turnover, obviously, does help cash as we can improve it. The next big opportunity for improving inventory will be better utilizing the inventory we have between our stores and the direct-to-customer warehouses, and we haven't even begun to take advantage of the opportunities there. So I would expect turnover to continue to help our cash flow over the next couple of years.

Our next question comes from Jeff Stein with Ticonderoga Securities. Jeffrey Stein - Ticonderoga Securities LLC: Karen, question on MAGIC Selling. It sounds to me like you're kind of stepping up the level of activity there and I'm wondering, have you in anyway been able to measure the level of conversion or improvement in conversion that you're getting from MAGIC Selling?

Well, it's hard to measure but it's also, obviously, the sales growth that we're exhibiting, certainly, I think, is apart attributable to MAGIC Selling. The other remark or comment I would make is that we, as you know, are measuring the equivalent of a Net Promoter Score and we are at levels now significantly higher than we were a year ago, which is when we began to measure that. I have to believe a lot of that is attributed to MAGIC Selling as well. Jeffrey Stein - Ticonderoga Securities LLC: Okay. So are you investing -- relative to where you started the year, are you investing more in that initiative now than you had originally planned?

No, we aren't. It's as expected. Jeffrey Stein - Ticonderoga Securities LLC: Okay. And the $57 million increase that you saw -- benefit that you saw from credit in SG&A, roughly how many basis points improvement did that produce in that ratio?

I'm not sure I understand. As a percent of what? Jeffrey Stein - Ticonderoga Securities LLC: As a percent of total sales.

I don't know the answer to that, Jeff. I could calculate it but I'll do it later and call you. Jeffrey Stein - Ticonderoga Securities LLC: Okay. And final question, quickly, which categories are you seeing the highest relative price increases or cost increases for the fall?

It's really going to be any areas that have a high percentage of cotton. So it will be a lot of the apparel areas and also home textiles, sheets and towels.

Our next question comes from Lorraine Hutchinson with Bank of America. Lorraine Hutchinson - BofA Merrill Lynch: Karen, can you share with us some early findings on price elasticity? Any difference that you're seeing in basic versus fashion or anything else you can call out to help us understand how these trends are going?

Well, I would say in fashion, obviously, there's less resistance as you would expect than in commodity areas. But I think the good news for us is that as we've done some tests and in commodity areas where we reduced the number of units, we've been relatively good at predicting that elasticity. So there are parts of the store where we expect units to be way down versus a year ago but in other fashion areas, particularly, less the case. Lorraine Hutchinson - BofA Merrill Lynch: And then, are there places particularly in private label where you're hoping to defend some of the opening price points and then perhaps raise on the higher fashion items?

Absolutely. There's not one answer to how we've dealt with the prices increases. In some cases where we know that customers is very value-oriented, we are not testing the cost increase completely or at all to the customer and hoping to make up the margin in other places.

Our next question comes from Adrianne Shapira with Goldman Sachs. Adrianne Shapira - Goldman Sachs Group Inc.: Karen, obviously, a great first half. It sounds like very confident as you head into the back half with your own opportunities as you kind of raised your comp outlook to 4.5. But give us a sense if you step back, are there places in the planning that you temper, whether it be some orders, inventory, even margins kind of how we think about it in light of the fact that the world seems to -- at least the market seems to be telling us that we're going to go into a bit more of a challenging back half.

I'm not sure we know that yet, Adrianne. I mean, clearly, there's market disruption. But how that affects customer spending, I don't think we know yet. I think the only comment I would make to you is that we are constantly reforecasting the business. So should we start to see weaker sales, we will start to react. But at this point, I think doing the right now might be an overreaction. Adrianne Shapira - Goldman Sachs Group Inc.: Okay, because, I guess, on your gross margin in terms of the guidance appreciate the fact that free shipping would be an impact there. But I guess previously for the year, we have thought about flat for the year...

Well, the difference though is not merchandise margins. The difference is the free shipping. Adrianne Shapira - Goldman Sachs Group Inc.: Okay. So that changed there.

Had the Internet not been growing as well, which, by the way, are very profitable sales, it's just from an accounting perspective the free shipping goes into margin. But the merchandise margins are still expected to be flat this fall. Adrianne Shapira - Goldman Sachs Group Inc.: Okay, that's helpful. And then talking about categories, with women's, casual, traditional women's, you've been calling that out as weak for some time, maybe kind of help us think about what actions are being put in place to stabilize, improve there, talk about maybe the inventory beds and is that through national as well as private label?

Well, I think I can speak more to the private brand side where we're spending a lot of time looking at the private brands that service that customer, particularly Charter Club, and have really retooled that line and are actually excited about its prospects. But don't expect this to make a big impact on this fall. And I guess I should add, as you're all beginning to be so worried, perhaps hopefully, overly so, about what if the fall sales disappoint us? I would say that the good news is, is that of the most areas that we have funded in terms of inventory and that have been growing so well are more of the center core areas, where the markdown risk is a lot less. So that should hopefully make you feel a little more comfortable if that margin risk should changes in the sales trend happen. Adrianne Shapira - Goldman Sachs Group Inc.: Okay, that's helpful. And then, beyond just in terms of the inventory and the margin, on the SG&A front, I mean, obviously, you talked about continuing to invest in omnichannel and -- but help us think about contingencies plans on the expense side.

I said so much of the increase has to do with added selling and added support in the stores, that if the sales don't happen, we won't add the expense. So there, too, if the sales trends change significantly, we have time to react.

Our next question comes from Bernard Sosnick with Gilford Securities. Bernard Sosnick - Gilford Securities Inc.: Karen, could you amplify a little bit on the difference in sales between the tourist areas and much of the rest of the country during the second quarter? Would you say that wear was somewhat weaker? I mean they were all up to plan, but wear was somewhat weaker or is mainly weather-related?

I don't know how -- I'm not sure that there were any major issues with weather in the second quarter. I'm not quite sure how to answer that. The business was pretty good across the country. As I said, we did well in all of our regions. The southern part of the country did particularly well all the way across -- from Florida all the way through to California and Hawaii. But in addition to that, tourist markets did particularly well. Bernard Sosnick - Gilford Securities Inc.: Now with regard to My Macy's, particularly in the Midwest and in markets -- I hate to use the word formerly serviced by May Department stores, are there kind of particular adjustments that are taking place to address the somewhat less affluent customer than, let's say, Macy’s would have been catering to and might have adjusted the inventory towards after the acquisition?

Well, I'm not sure I agree with your distinction between May and Macy’s, but it's sort of not relevant anymore. I think the key thing is with My Macy's, store-by-store, we're reacting to the customers in that store and in that trading area. So there are a lot of places where the mix of customers is more moderate than others, and that we are responding with putting in that inventory that appeals to that customer. So I think the short answer to your question is yes, we are responding. That's one of the beauties of My Macy's. Bernard Sosnick - Gilford Securities Inc.: Yes, I believe in it. I appreciate it and I asked the question in that vein. Anything with regard to gift strategy during the holiday season that's noteworthy?

Well, there's a lot that's noteworthy but I'm not sure I'd want to tell you, given that the competition will find out at the same time. But we are very excited about our gift strategy, building on a lot of things that we hit on last year. And we feel great about the marketing campaign, which in many ways is going to be omnichannel this year, as well as the assortments and in-store execution. It should be a terrific holiday season.

Our next question comes from Bob Drbul with Barclays Capital. Robert Drbul - Barclays Capital: I guess to ask the question a different way, when you look at the uncertainties that's out there, the unsettling markets, what categories are you watching closer today that you weren't really paying that close attention to over the last few weeks or months?

We're watching every category more closely today than we were before the last couple of weeks. There's really not any one in particular that I would point to. Robert Drbul - Barclays Capital: Okay. And in terms of the credit card income, can you give us a perspective on where we are within the credit card business? ROA reserves or writeoffs maybe relative to '07? Just trying to understand sort of the differences today in those levels versus where they were.

Yes, I mean we're getting back to historic levels of profitability of that business so it's really quite good right now. Robert Drbul - Barclays Capital: Okay. And then, can you talk a little bit about the Bloomingdale's outlets, sort of the unit economics around that and sort of any updated thoughts on the ultimate penetration for that store?

No, I mean we continue to feel like it's a good opportunity that interestingly, we think, is building the brand even in the full line stores. So we feel good about it. But it is, as you know, a very different business in the full line stores and so we're learning as we go. But we will continue to open them. And how many we ultimately get to, I think it's too early to tell you that. I just don't know. Robert Drbul - Barclays Capital: My last question is on the AURs, up 4%, are you seeing any shopping habits change around the different prices in terms of a flock to more on the promotional events or anything like that?

Not yet.

Our next question comes from Rob Wilson with Tiburon Research. Rob Wilson - Tiburon Research Group, Inc.: You mentioned that AUR was up 4% in Q2. Can you give us maybe the primary driver of that in Q2?

It's a combination of the factors that I talked about. Some of it really is mix change. Some of it is stronger regular price selling. But also, we were beginning to experience some of the price increases that we expect to continue into the fall season. Rob Wilson - Tiburon Research Group, Inc.: Okay. And why do you suggest that August would you be your strongest month in the quarter, Q3?

Well, we moved our Shop for a Cause event from October into August so that should help. And we did that to frankly have less events in October and spread it out better. So that should lead to higher sales in the month of August. Rob Wilson - Tiburon Research Group, Inc.: Okay. And finally, I go back to that regular price sell-through, are you expecting higher regular price sell-through in the second half of the year?

We don't really plan it that way but it has been through this spring, so we would expect that it would continue.

Our next question comes from Kenneth Stumphauzer with Sterne Agee. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: I just have a couple of them. As far as the credit income, you indicated it was a $57 million tailwind in the quarter. Am I correct about that?

Yes. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: It just seems exceptionally larger than the context of the how much that contributed last year. I think it was like $322 million for the full year. Is there anything structurally different that would explain that, or is it just that we're in a better part of the cycle at this point?

There is nothing structurally different. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: So this would suggest that you can get back to kind of like peak 2006 type income levels, is that correct?

Well, you've got to be careful with -- you have to look at a period after we sold the business to Citi. But yes, we will get back to peak profitability. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: Okay. And then as far as the gross margin impacts from e-com [e-commerce] and free shipping, can you quantify how much that was in the quarter and what you're expecting to be in next quarter?

No, we have not broken that out. But it is the entire reason that the margin in the second quarter was below a year ago. Kenneth Stumphauzer - Sterne Agee & Leach Inc.: Okay. And then just finally, as far as comps go, looking backwards, obviously, this quarter and the preceding quarter accelerated from the prior period in the second half of 2010. Do you think you can attribute any of that increase to the increasing price points or better-than-expected demand elasticity?

I don't know. I got to stop and think about that one. Clearly, in the second quarter, the AUR was up more than it had been in the first. So I think that probably is true.

Our next question comes from Priya Ohri-Gupta with Barclays Capital. Priya Ohri-Gupta: I just wanted to confirm that you're still expecting to pay down the maturity that you have coming up in September. And also, if you could address your plans for the other maturities you have coming due over the next 12 months?

Yes, on the maturity in September. And for the next 12 months, we're really going to manage that around our credit ratios. So some of that debt that matures in 2012 will get paid down. Others could be refinanced.

Our next question comes from Deborah Weinswig with Citi. Deborah Weinswig - Citigroup Inc: Can you update us on where you are with regards to the rollout of your optimization technology and when should we expect the benefits to impact the business?

Yes, and I'm assuming you're talking about pricing optimization? Deborah Weinswig - Citigroup Inc: Yes.

Yes, we are just beginning to start testing it and so would not expect a rollout until probably -- a full rollout probably until early '13. But certainly, by this time next year, it will have been rolled out to a significant part of the company. And we are obviously very excited about where we think that will enable us to do. It should help gross margin rate and also it should help sales. Deborah Weinswig - Citigroup Inc: And then, you would refer earlier to being in the early innings with some of your key strategies. With regards to MAGIC Selling training, omnichannel, My Macy's, can you just update us with regards to what innings you actually are in?

Well, that's obviously a major judgment call, Deb. On MAGIC Selling, we are just scratching the surface and beginning to make an impact. So it's hard to give you an inning but it's very early. In terms of omnichannel, I would say the same thing. So we're obviously farthest along with My Macy's but even that is still early in the game. Deborah Weinswig - Citigroup Inc: Okay, very helpful. And then, how many stores at this point in the game have Impulse Beauty and have you noticed any difference in the comps in those stores?

I don't know the specific number, I'm sorry. I'll have to get back to you on that. But those stores with the Impulse Beauty are doing better in cosmetics. I have not checked the total store. Deborah Weinswig - Citigroup Inc: And then, you had mentioned on the call about store-to-door. Can you maybe just provide an update on that initiative?

Yes, let me go back a step and put that in context. Around this time a year ago, we rolled out something that we call Search and Send, which is if you're in a store and we don't have what you want in stock, the sales associate can very easily order it for the customers from the online inventory. During the fourth quarter last year, we tested in a couple of stores on the West Coast the ability through the same Search and Send but have inventory pulled not only from the central warehouses supporting the Internet business but also from these 2 store location, i.e. store-to-door. And we found that by doing that, we were more likely to be in-stock when the sales associate searched for an item and, therefore, satisfy more demand. And so we've now got that in 23 locations, and it will be over 150 locations by this time a year from now. And we are -- so now throughout the company, you're able to go to a Macy's store and have the associate search the inventory invisible to the sales associate but will pull it from stores in addition to the Internet warehouse. And this is all a part of trying to be able to better satisfy customer demand and also, over time, make our inventory investment far more productive. It's really quite exciting.

Our next question comes from Wayne Hood with BMO Capital Markets. Wayne Hood - BMO Capital Markets U.S.: Yes, Karen, I had a question and it kind of relates to pension plan right now. Given what's going on with the yield curving credit markets, it's -- and things could change daily, I know, but as you begin to think about like '12 and '13, with them wanting to keep rates low for a sustained period of time and you've got 8.75% expected long term rate of return built into the plan, at what point do we begin to think about we need to make adjustments to that given where fixed income rates or the yield curves is going to be and where markets are right now?

Well, first, it's 8%. But secondly, we review it every year and we'll do that again this year. Wayne Hood - BMO Capital Markets U.S.: Well, I guess, given where the fixed income markets are, you would think you would have to review that as opposed to leave it alone?

No, I don't know that. Wayne Hood - BMO Capital Markets U.S.: Okay. The second question I had would be, can you give us some sense of the percent of merchandise that's tied to free shipping and kind of what your assumptions are for minimum orders for free shipping because a lot of companies last year and this year are using that as competitive edge and just wanted to see where you're thinking you're going to come out on all of that?

I'm not sure I understand your first question, anything is eligible for the free shipping... Wayne Hood - BMO Capital Markets U.S.: Yes, so what percentage of that?

Percentage of what? Wayne Hood - BMO Capital Markets U.S.: Percentage of sales that's tied to free shipping.

I don't know, I'm sorry. Wayne Hood - BMO Capital Markets U.S.: Okay.

Currently, if you're in a store and you take advantage of the Search and Send, anything over $50 is free shipping. And online, it's $99 for Macy's. Bloomingdale's is higher. Wayne Hood - BMO Capital Markets U.S.: Okay. And then my last question, I guess, back to the credit thing, would you anticipate in any way that with the reserve unwinding that you would go deeper into the file to drive traffic or to develop more deeper credit promotions to differentiate yourself given that reserve unwind potential?

I wouldn't relate the 2, but we are always looking for opportunities to profitably increase the amount of credit we can offer to our proprietary card users. So we're doing that on an ongoing basis.

Our next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Can you talk a little bit about the complexion of how you're thinking about the comp guidance given the 4% increase in AUR that you got in the second quarter? Do you expect it to be similar as you move forward, given the price increases that are occurring? And then just lastly, as you think about fall and holiday, events, product focus, how will it be different this year than last year?

Let me answer the first question, which is, as we have said, we're expecting the AUR to increase 5% to 7% in the fall consistent -- and in our guidance is the 4% is to 4.5% so obviously you see the delta there in terms of units. And in terms of areas that we're focusing on, in terms of the holiday business, I think I'm going to pass on that.

Our next question comes from David Glick with Buckingham Research Group. David Glick - Buckingham Research Group, Inc.: Just looking at the success of your Internet business, I know there are a lot of factors underlying it. I'm wondering how much of it do you guys attribute to the shift in your advertising budget to more digital versus TV and print, and does that give you more confidence in accelerating that shift as we go forward?

Well, actually, I think the digital marketing is doing more to drive the store business. So actually, I see that as helping the store business as much as they do the Internet. We are making so many improvements on the site, week-by-week, month-by-month, better assortments, more consistent with what's happening in the stores, which is helping better marketing, more personalized offers out of the website. But I do think we're going to continue to see outsize growth there.

[Operator Instructions] Our next question comes from Bernard Sosnick with Gilford Securities. Bernard Sosnick - Gilford Securities Inc.: Karen, could you give us any guidance as to annualized projection for online sales this year?

No. Sorry, I mean -- no. A, I don't have the number; and, b, we don't break it out. It's obviously contained within the comp of the 4% to 4.5%.

It appears there are no further questions at this time. Ms. Hoguet, I'd like to turn the conference back over to you for any additional or closing remarks.

Really, just thank you, all, for your support. And if you have more questions, feel free to call us and we'll try to be helpful. Thanks.

This concludes today's conference. Thank you for your participation.