Karen Hoguet - CFO

Oliver Ken - Cowen & Company Lorraine Hutchinson - Bank of America Kimberly Greenberger - Morgan Stanley Paul Swinand - Morningstar Paul Lejuez - Wells Fargo Jeff Stein - Northcoast Research Paul Trussell - Deutsche Bank Matthew Boss - JPMorgan Michael Binetti - UBS Joan Payson - Barclays Stephen Grambling - Goldman Sachs Bob Drbul - Nomura Securities Matt Mckinley - Evercore ISI Richard Jaffe - Stifel Dana Telsey - Telsey Advisory Group David Glick - Buckingham Research Group Michael Exstein - Credit Suisse Laurent Vasilescu - Macquarie Alexis Gold - HG Vora

Good day everyone and welcome to the Macy’s, Inc. Fourth Quarter Earnings Release Conference Call. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Karen Hoguet. Please go ahead.

Thank you. Good morning and welcome to the Macy's conference call. I am Karen Hoguet, CFO of the company. Any transcription or other reproduction of the statements made in this call without our consent is prohibited. A replay of the call will be available on our website www.macysinc.com, beginning approximately two hours after the call concludes. Please refer to the Investor Relations section of our website for discussion and reconciliations of any non-GAAP financial measures discussed this morning. Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the company’s actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the company’s most recently filed Form 10-K. We are very happy to report that we have reached our long-term profitability target of 14% EBITDA rate for fiscal 2014. As you know, this has been a goal on which we have stayed focused even after the setback in the 2008-2009 recession. We also were able to achieve 10% adjusted EPS growth in 2014 and hit the low end of our original guidance from a year ago, a $4.40 to $4.50 for annual EPS and exceeded our revised guidance of $4.25 to $4.35 that we had provided at the start of the fourth quarter. We at Macy's had put together a string of very good years and we have no intention of stopping now. Think about Macy's journey over the past 10 years as having three phases. The first phase began in 2005 with the May Company acquisition. We took two very good retail companies and put them together to form a really great company with a huge depth of talent, great store location, an early stage online business and relationships with most wanted merchandise brand including our own private brands. In the first phase, we converted a disparate collection of regional name plates into a nationwide Macy's brand and a somewhat larger Bloomingdale's brand. The second phase began 2008 and 2009 as we molded ourselves around the MOM strategy, My Macy's, Omnichannel and MAGIC Selling. In these past six years, we have made enormous stride in adopting and involving localization creating a truly Omichannel business with seamless integration across stores, online and mobile and deepening customer engagement through MAGIC selling. In this second phase, we found growth in both owned and license businesses. We put together five consecutive years of comp sales growth, six consecutive years of double digit growth and adjusted EPS, and now hit a longstanding target of the 14% EBITDA rate. Coming into 2015, we entered our third phase. Having now reached one of the industry's highest profitability rate we are focusing ourselves on accelerating top-line sale growth while maintaining this best in class profitability rate. You have seen this restructure merchandising and marketing with an Omichannel view of our customer, inventories and business. We also brought all of our technology functions under one senior leader. We have aligned all the elements of our base business so we can act faster and be quicker to decision in driving organic growth, and we also now set up a new structure with top talent to foster innovation and new business opportunities such as international and off price. The upcoming acquisition of Bluemercury creates an entirely new channel to reach additional customer segments while also helping to grow beauty in our base business. As exiting and gratifying as the first two phases have been, this new phase we have entered has the opportunity to take our company to a whole new level of success. We have the ability to create a larger relationship with existing customers and make inroads with customers that have not traditionally shopped either Macy's or Bloomingdale. So let's talk now about the fourth quarter and the highlights of the full-year performance. I will then talk about our outlook for 2015 and end, as always, by taking your question. Our fourth quarter sales were $9.364 billion, up 1.8% over last year. As we announced on February 3, our sales increased 2.5% on a comp own-plus-license basis in the quarter. Our stronger businesses in the fourth quarter were coats, active, dresses, handbags, younger millennial apparel, shoes, both men's and women's, cosmetics and furniture mattresses. Interestingly, two of those, dresses and shoes, men's and women's, were areas where we tested the single view of inventory between stores and our direct-to-customer warehouses. This is what we just rolled out company-wide as a result of these successes. This gives us great optimism for our ability to accelerate growth. The weaker businesses in the quarter were Housewares and Top of Table. Geographically, we did the best in the southern region, as well as the Midwest. Our strongest growth markets were throughout the southwest but also included Colorado and Midwest markets such as Chicago, Detroit and Indiana. Our tourist stores for both Macy's and Bloomingdale were heard in the quarter driven by weaker international tourist spending in light of the stronger dollar. In spite of this though, Bloomingdale had a good quarter and improved versus their third quarter trend. Our digital channels at both Macy's and Bloomingdale did extremely well in the quarter. We were very focused and pleased with what we accomplished with buy online, pickup in store, both because of the number of the customers who utilized this new way of shopping but also for the radiated sales that we got when the orders were picked up. And our Same Day Delivery test was successful and we will expand in 2015 to additional markets. Average unit retail in the quarter was 1.4% versus last year with total transactions up 2.5% and average units per transaction down 1.3%. Gross margin in the fourth quarter was 40.3%, down 30 basis points from last year. Merchandise margin was down by approximately the same amount. The growth in delivery expense due to the Omni transaction was offset by the increase in income from the license businesses and other miscellaneous factors. Recall though that I told you to expect a decline in gross margin rate in the fourth quarter and for the back half of the year our gross margin rate was down 10 basis points which was consistent with our guidance. Inventory at year-end was down 0.7% below last year and on a comp basis it was up 0.9%, a little less than 1% of last year. This is consistent with our strategy to improve inventory turnover. At year-end, we were not yet experiencing a problem from the West Coast port slowdown. Since then, however, our inventory levels have been negatively impacted particularly in apparel and accessories. Approximately 12% of our first quarter merchandise receipts are being delayed and this will have some impact on our sales, gross margin and expense in the first few months of the year, but we have incorporated our expectations into the guidance we provided today. SG&A in the fourth quarter was $2.324 billion, up 1% over last year and down 20 basis points as a percentage of sales. This is better than we had expected. The primary reasons for expense being lower than we expected were lower medical and retirement expenses and stronger than expected credit performance. Credit income in the quarter was $240 million, up $22 million over last year. The usage of our proprietary credit cards reached 47.4%, which is 30 basis points above last year. Retirement expense in the quarter was $12 million which also was better than expected. The quarter also included asset sale gain of $36 million, which is $22 million lower than then asset sale gain last year in the fourth quarter. Operating income excluding impairments, store closings and other costs was, therefore, $1.451 billion, up from last year's $1.437 billion on the same basis. This increase was 1%, but remember, there were shifts between the third and fourth quarters. And for the second half of the year, operating income on this basis was up over 4%. Impairment, store closing cost and other costs were $87 million, which is better than the $100 million to $110 million we had expected when the announcement was made in early January. This is primarily because severance came in lower than anticipated. Of this amount, approximately $33 million relates the non-cash asset impairment. Interest expense in the quarter was $97 million and we also paid a $70 million premium on the early retirement of the debt in the quarter. Tax expense was $457 million in the quarter and net income was $793 million. Excluding the impairment, store closing, debt premium and other cost, net income was $857 million in the quarter, down slightly from last year's $865 million. Average diluted share count in the quarter was 351 million shares, which is 6.5% lower than last year. During the fourth quarter, we utilized $470 million to buyback stock, brining the full-year stock buyback amount to $1.9 billion. And during the year, we bought back 31.9 million shares. EPS in the fourth quarter on a diluted basis was $2.26 or $2.44, excluding the items mentioned earlier. This is up 5.6% over last year on the same basis. So as I said earlier, the fourth quarter performance helped to make 2014 another good year for Macy's. Let me just summarize five key highlights as I look back on 2014. Comp sales on an own-plus-license basis were up 1.4% for the full-year. And while we think we fared well versus competitors, we did not achieve our original expectation. We achieved 10% adjusted EPS growth in the low end of our original guidance. Our adjusted EPS has grown 26% per year since 2009. We hit our long term goal in 2014 of reaching the 14% EBITDA rate and we achieved a return on invested capital of 22.4%, 90 basis points above last year, and we generated over $1.7 billion of cash flow after operating and investing activities which is about the same as we did last year. CapEx in the year was $1.068 billion which was a little below our $1.1 billion budget due to timing. We are very proud of this performance, but as we look forward we are focused on accelerating growth. The changes made to our organization in January and in early February were made with this in mind. We reorganized our merchant and marketing organizations to make them faster, more nimble and better connected between the stores and the digital world. While we now have Omni buyers and planners who span both channels, we also have digital merchants who are 100% dedicated to working with the Omni merchants to drive digital growth. Just to be clear, we did not eliminate .com merchants at Macy's. We do realize that we have lots of people learning new parts of their jobs but we believe our teams can make these changes and still deliver the expected result this year. We also made changes to our senior team to enable two key executives to focus more on growth, Jeff Gennette, our President and Peter Sachse. Jeff replaced himself as Chief Merchant, so he could have more time to strategize growth. He will be focusing on organic growth including subjects like digital growth, key families of business like beauty and jewelry, as well as how to grow more aggressively with our private brands as well as our key vendor partners. Peter will be working on new growth initiatives and innovation. This is the first time we have had a senior person assigned full-time to focus on growth. Short-term Peter is working with his new team on piloting and off price concept and developing our approach to innovation. They also will be studying international opportunities both store and digital. This is all very exciting and these changes have really energized our organization. Adding to the excitement is the pending acquisition of Bluemercury. We see such opportunity for Bluemercury to expand their business rapidly across the country in the digital channel and also maybe perhaps overseas down the road. We also look forward to opening Bluemercury shops within our Macy's stores. This accelerated growth won't happen overnight, but we do expect it to make a difference in our top-line results over the next two to three years. We will be testing different ideas and will rollout those ideas that have potential. We are all very excited about this and much like our MOM strategy we expect our team to execute this well and deliver outstanding results. Our guidance for 2015 a transition year and straightforward. And even though we see it as a transition year, we are still guiding to sales and EPS growth. We are assuming comp growth of approximately 2% for 2015 on both an owned and an owned-plus-license basis with total sales growth of approximately 1%. We're guiding to a flattish EBITDA rate as a percent of sales and earnings per share on a diluted basis of $4.70 to $4.80 per share. In terms of capital spending, we are increasing our budget by approximately $100 million to $1.2 billion to help fund the growth initiative. We are making investments in growth but the key to our approach is balance. We want to accelerate growth but it needs to be profitable growth. By planning ahead we were able to offset these growth and technology investments as well as headwinds from higher expected benefit cost and information security with the $140 million savings that we're expecting to get from the restructuring that we announced in January. And as you are building your detailed models for 2015, here are three other key planning assumptions that help. Interest expense we're assuming at approximately $380 million. We're planning a tax rate of approximately 37%, and depreciation and amortization is expected to be approximately $1.060 billion in 2015. We also will be closing the Bluemercury deal hopefully during the first quarter. This guidance does not include Bluemercury, but while that acquisition will add sales obviously to 2015, we don’t expect it to be accretive to earnings in this partial year. As I said earlier, we are very excited by the opportunities to accelerate sales of our base businesses of Macy's and Bloomingdale’s, and going forward we see opportunity to accelerate our growth in other ways as well. We look forward to updating you on our progress in the quarters and years ahead. And before I pause for questions, just one piece of housekeeping. We have decided to change the time of our earnings calls going forward to 9:00 am Eastern Time beginning with our first quarter 2015 earnings call in May. We had talked to many of you about this and concluded that it makes sense. We think this will enable us to get information out to all of you faster after we release our earnings at 8:00 am. And with that, I'll open the call up for your questions.

Thank you. [Operator Instructions]. And we'll go first to Oliver Ken with Cowen & Company.

Congrats on solid results and on the evolution of model here. Regarding the next steps in thinking about how you're looking at Macy's in a more growth orientated fashion, on the off price side, could you speak to the customer target and how vendor relationships may evolve and if online will play a role here? And just as a question for our models, as we're thinking about the 2% comp guidance, did you have an inclination in terms of how we should think about UPTs versus transactions in terms of what you're seeing and what we may extrapolate? Thank you.

Yes, on the second question, no, we really -- its -- we don’t expect major change in average unit retail units per transaction etcetera as we looked at '15. I mean in terms of the off price pilot, I think it's pretty mature to really answer those questions. We're obviously looking at stores and digital as we think about it going forward, but not sure exactly yet how that will look. So as we get to test and the pilot started we'll talk more about that.

Okay, thank you. Best regards.

Thank you.

We'll go next to Lorraine Hutchinson with Bank of America.

Karen, you called 2015 a transition year. So guess I just wanted to get your thoughts on that. Is that a year of increased cost and then we’ll see that investment come down --

No, because remember we're holding to the 14% EBITDA rate. So the key is holding the profit rate and trying to strategize to get greater growth. So we don’t expect to see the accelerated growth in '15, hence the 2% comp guidance, that’s really where the transition is. As I said, we expected to make the investments in growth and, therefore, the restructuring is funding those investments. So anticipated and then planned for it, but again holding both for EBITDA rate and also earnings growth.

Great. And then as we look to our longer term cash flow model, is $1.2 billion the new level of CapEx or is that -- would that be just for this year and then perhaps fell to come down a bit?

Well I don’t think it will come down. I think the question is how is the model going to evolve going forward, but I don’t anticipate it going down. Well there is going to be ongoing investments in technology for ever, so I can't say you what they are going to be but year whatever was we budgeted last year there's new subjects to go in. And so we believe that the technology spend will not go down at least as far out we can say and, obviously, we’re continuing to maintain and add new stores where we can. So I really don’t anticipate a reduction.

Great. Thank you.

And from Morgan Stanley we'll go next to Kimberly Greenberge

Great. Thank you. A really fine end to the quarter or rather and for the year here in Q4, Karen.

Thank you, Kim.

I'm wondering obviously the new strategies and initiatives you got, you have in place to drive an accelerated revenue growth over the next two to three years, 2015, if I could read between the lines, is sort of seed year if you will to put the things in place that will drive that growth and I'm wondering what metrics internally will you all be looking at to gauge whether or not you are on track to deliver that acceleration and growth, and are there ways that you can share some of that information with us along the way so that we can understand how you are performing relative to your expectation?

So I think I mean the easiest way to track is going to be our comp sales performance. So achieving that 2% will be very important as a signal as to whether things are working. We will also be testing various things throughout the year but we won’t know the results until we get through the fourth quarter next year. So it's going to be hard to keep you up-to-date. Obviously, if there's something we're either very excited about or we’re not going to pursue we'll tell you, but we are testing what the concepts and ideas that we hope to rollout next year. Much like if you think about the single view of inventory, we tested it last year. We started with dresses on the spring season of '14 and then added four or five business until the fall so that we would know whether we could roll it out this year. And as I said earlier, we were so excited by the results of those tests we rolled it out to the whole company.

Great. Just a follow-up on your comp guidance for 2015. The 2014 rate obviously fell just a fraction of a point underneath that 2% goal. You've got a lot easier comparisons in 2015 but is there a something else feeding into that 2% comp target it 2015 that wasn't really there for 2014?

No, I mean '14 we did 1.4%, so the 2% is actually higher than 14%. So I don’t think there's anything unusual about the year 2015 when it comes to the comp guidance.

I mean anything unusual that could help it reaccelerate to the 2% level?

Sure. I can give you a whole list of things. It gives me great confidence that it could do better, but at the same time you just don’t know.

Okay. Thanks, Karen.

And we'll go next to Paul Swinand with Morningstar.

Good morning and thanks for taking the questions as always. Wanted to just -- sorry if I'm beating the horse here, but the CapEx at $1.2 billion, if you are going to hold at the same I'm assuming that the top-line is getting better, is that you are targeting a rate of sale or a percentage of sales?

No. Just as we don’t know what is going to happen going forward in terms of the capital budget as I've listened to various investors call lately there's something fusion around technology and some have implied that it should come down over time, and the point I'm trying to make is I don’t expect that to go down nor do I expect the investment we’re making in our store business to go down over time. So the only question could be might there be more rapid spending on some growth initiatives, and at some point there could be if we see the opportunity, but at this point I wouldn’t know what it was or how to quantify it.

And with the risk of you not wanted to reveal all your plans, is the $1.2 billion more leaning towards the technology? And then can you give us any color and the composition of the increase and how its go look on forward?

Well if you think about the $1.1 billion, I mean that encompass the technology that we've been spending that we'll continue to spend. The extra $100 million roughly is for growth initiatives whether it would be to expand Bluemercury, whether it would be the off price pilots that we are talking about and other things like that.

Okay, great. Thank you and best of luck.

Thank you very much.

And from Wells Fargo, we'll go next to Paul Lejuez.

Hey, thanks, Karen. Can you maybe talk about some of the major buckets of expenses in 2015, where you expect to see leverage versus delverage, and specifically, if you could touch on your assumption for credit income and retirement expense, how those factor in to guidance this year?

Yes, credit income, my suspicion for next year will be flat to down slightly, and as often is the case of credit it maybe lumpy because if you think about the roll-out of the chip cards that will come most likely all in the third quarter. So you may see some odd quarterly progression on the credit line, but in total for the year, we would expect it to be flat to down slightly. On the retirement expense, after obviously huge reduction this year we do expect it go up modestly in '15 but not by a huge amount. Healthcare is obviously going to go up significantly which again shouldn’t surprise anybody. I think those would be major factors as we've talked about headwinds. And then obviously we continue to invest a lot in information security, and then also in these growth initiatives which obviously dumped their sales yet, and so we’re investing in those, but we are covering with the restructuring that we had announced earlier at this year.

Got you, thanks. And then how should we think about asset dispositions offsetting CapEx in 2015 and beyond, and how that might factor into the P&L as well?

Well we've had significant asset sale gain for last couple of years, as you know, and I would expect that to continue as we go forward; I think that's just going to be a piece of the business. I can’t tell you what the amount is, but we are assuming in our guidance that we will continue to monetize stores.

Okay. Thanks, Karen. Best of luck.

Thank you.

And from Northcoast Research we'll go next to Jeff Stein.

Given the fact that you are planning kind of flattish EBITDA margin, can you talk a little bit about kind of what's going on within the P&L, kind of outlook for gross margin and SG&A? And also wondering if you have given any thoughts now that you have achieved your target EBITDA margin, is there any thought being given to kind of resetting the bar?

Oh, my goodness, let us enjoy it for five minutes. The really answer is look it could go up a little bit, but we are not aiming to go higher. We believe we've hit the right balance between growth and profitability in achieving this, but as we said repeatedly, when we originally were thinking about going a lot higher that it was going to impede growth. So our judgment is staying around 14% is the right answer. And again, it could go up but we are certainly not going to strategize to make that happen.

And taking a look at gross margin this year and SG&A directionally, how would you make a deal?

Yes, we are not going to give a lot of guidance here yet. We are still formulating the plans, but I wouldn’t expect significant change on either line at this point.

Okay. And final question, the women's sportswear business is just kind of been in the doldrums for a number of years now. Any thoughts in terms of what might possibly reignite a stronger trend there, and do you have anything or have you seen anything in your business to give you encouragement on that side?

Did you say women's sportswear?

Yes.

Well, I think used to think about defined by what women are wearing today, and actually if you think about that dresses has been extremely strong and continues to be so, both their dresses and evening dresses, so active, at leisure. So I think we all need to think about women's apparel differently, and actually it had a pretty decent year last year when you think about it more broadly.

Okay. Thank you.

And our next question comes from Paul Trussell with Deutsche Bank.

You mentioned the impact from the West Coast port issue on 1Q. Just wonder if you could elaborate a little bit on that and how we should think about the cadence of comps during the year given that impact as well as any timing of marketing shifts or the launch of any particular initiatives.

Yes, we are not providing guidance by quarter that way. So I'm sorry that I really can't help you there. Clearly sales margin and expense will get impact for some degree in the first quarter, because of the port situation, but I'm not going to give guidance by quarter.

Understood. And then as we look at the balance sheet obviously you discussed modestly higher Capex. Is there any change to the cadence of buyback, just how you are thinking about usage of cash as well as your targeted leverage ratios? Any changes there?

There is no change in our targeted leverage ratios, and the way we use our excess cash as you know in addition to paying the dividend has been to buyback stock with the cash over and above what we are using for Capex. So while we don’t get guidance for specific buyback number, you can't expect this continue to be aggressive in terms of buying back stock.

And just lastly, you have mentioned international as one of your initiatives. Obviously, there are some license stores to be opened in the UAE area this year. Is there a potential for a owned international store, just how are you thinking about that particular initiative?

Yes. And at this point, we have one Bloomingdale's store in Dubai and we have the Macy's and Bloomingdale's license locations opening in 2018. So they are not opening this year. And at this point, I'm not really even sure we have a good answer to that yet. We have been extraordinarily successful with the Dubai partnership. Our partner there runs a terrific Bloomingdale. And it's been great not only for sales there and the profit we get from the license agreement but, more importantly, it has helped our business here in terms of international awareness, as we all know the world has become so global. So we are very excited about that. But we may very well end up owning our own stores in other parts of the world at some point; we just don't know. And as I mentioned earlier, we are also looking at online and Omnichannel opportunity. But when you see how well our brands resonate with the international tourist in this country, it frankly seems like we should be utilizing that brand awareness and the popularity of the brand in some way. But we haven't figured out how to do that. And as always you'd see us do it in a balanced and rational way as we have done in fact with Dubai with Bloomingdale's.

And we'll go next to Matthew Boss with JPMorgan.

Hey. Good morning, Karen.

Good morning, Matt.

So larger picture, can you talk about the balance between multiyear growth investments and the earnings growth algorithm here? And more so, what's the best way to think about phases of the three-year growth map in 2015 versus maybe 2016 and 2017?

Well, this maybe over simplifying it. But I separate sort of the organic base business growth and that hopefully will accelerate in '16 as SVI rolled out to the company as the new organization is better able to focus on Omnichannel growth, as well as some of the initiatives we are working on that we talked about -- that I talked about earlier. The newer ideas that Peter is working on will probably take more time to have an impact on the company. And so those will less likely have a big impact in '16 or '17. But again, we are building for the future, I mean it's really the key here. But in terms of the organic growth, we hope to begin to see impact very quickly. And obviously comp growth is a very good thing for the bottom line of the company and the cash flow, so good that that’s happening soon.

Okay, great, and then can you just talk about some of the learnings from the single view of inventory test that you did across shoes and dresses, and more so kind of the best way to think about the top-line and margin opportunity that we could see now that its rolled out across the chain?

Yes, I mean a couple of things. One is that in one of the teams that began analyzing not just the demand in the stores in a given market but they also looked at the .com demand in that market and, as a result, they're now analyzing with, we call it trade area demand, and it's allowing them to allocate better the merchandise location to location. In another test -- in another area we began testing online which gave us very quick results so that we can rollout a new product very quickly and so that’s been helpful. Also we've been able to negotiate differently as we're working together. So there is lots of opportunities for growing the business that our teams have found and I think it's just only beginning.

And from UBS we'll go next to Michael Binetti.

Quickly on, obviously the Wal-Mart announcement major increases to minimum wages and I know a lot of the positions that you guys have are -- would be at above that rate but as I look around the web I can see some of your entry level positions are in a range of that I would say might have upward pressure on them with a big competitor -- I guess a big retailer like Wal-Mart having making some raises there. Can you talk to us a little bit about your thoughts on whether that will impact you or maybe how much of the work force could be upward pressure on the wage rate?

Yes, obviously wage rates are subject we studied quite closely, and currently our wage rates are above the state minimum wages, and we tend to provide first jobs for many of our associates and we knew if these entry level associates up the wage scale as they can experience. Having said that, we're constantly studying what's happening and, by the way, its market-by-market and what we need to do to be competitive in terms of our hiring. So I think this will be an ongoing area of attention.

Okay, and I guess just a follow up on the off price initiative you mentioned, I find it interesting that consumers obviously showing that they appreciate that channel. Obviously, you have leadership position in your existing business but there is installed competition in that sector. What do you think about that attracted you guys to that space that could your advantage as you jump into a category with an installed base of competitors and maybe where some of the challenges in that businesses that will be new for your team compared to what they're doing today?

Well obviously, there is always challenges in starting a new business and particularly one way there is very successful competitors, but our team thinks they have the opportunity to compete quite effectively against these players. Obviously, I'm not going to tell you until we started rolling that. But the team feels very optimistic that we will do well, but again this is one of those ends we will let the customer vote and see what she says.

Any perspective on the dividend before you go?

No, I mean the dividend is an important part of our capital allocation strategy; there is really no change there.

All right, thanks.

Our next question comes from Joan Payson with Barclays.

Karen, you mentioned tourism issue in the fourth quarter. Could you share either all portion of sales as that’s related to tourism or how much of an impact that had in the fourth quarter? And then could you also provide some additional detail on the 2015 comp outlook and what's driving the plan for that licensing component?

We don’t break out the tourist business or the international business, obviously it's more of an impact in places like New York City or Downtown San Francisco but we don’t break it out and total or the impact have had on the quarter. Obviously, we do everything we can to offset it. And in terms of the comp guidance, we've given about the same guidance for the owned and the owned-plus-license. Well our license businesses are growing faster than the owned, so maybe there will be somewhat of a delta. We don’t expect it to be like it's been in recent years because, at this point, we're not planning to introduce any new license businesses to our mix. So obviously, if we were to announce a new business that would change our guidances, but for now the guidance is about 2% both on a own basis and in own-plus-license, but we would expect the own-plus-license to be a little bit higher.

Great, thank you.

And from Goldman Sachs we'll go to Stephen Grambling.

Just one follow up on Matt's single source inventory question, how is this impacting your plan for the growth rate in inventory and maybe how that will impact turns, and is there actually an opportunity for ROIC at this point the whole they even improve as margins are flat and CapEx is up relative to sales?

Yes, I mean that’s the dream. And again I think as our buyers and planners are looking at inventory across the direct to customer warehouses and stores. They're being so smarter about where to put inventory or moving it channel to channel. So I think it's going to have a big impact on turnover which will be very good down the road. Now I don’t think that will all be in '15. As I said, this is a transition year, but we are optimistic that this could make a difference.

That’s helpful. And then I guess changing gears, if we look at the ecommerce business, is there any detail that you can give on how the assortment online has changed over the past few years, and how you expected to change going forward perhaps aside from the Bluemercury deal?

Well I mean I think we continue and try to offer both at Macy's and Bloomingdale's the best assortment we can. In some cases, we extend what we have in the stores what we call the endless aisle whether it'd be big and tall, sizes or small sizes that may not be in every single store, so that’s been a big help. There is some merchandise that we have only online. But for the most part we're aiming for more congruency between stores and online.

And is there an opportunity to maybe move to more drop shipping?

Well we do a fair amount of that today from the vendors. Remember that if a order is combined, it's not only sufficient to ship part from the vendor and part from us, but we're always looking for those opportunities. And again, we start with what the customer wants and try to make these decisions in the smartest way we can.

Our next question comes from Bob Drbul with Nomura Securities.

Just a couple of questions. On I guess overall when you look at the business the health of the consumer in the trends of like opening price points versus some of the collection businesses, can you just talk about any of the trends that you're seeing there and any impact on GAF? And then in terms of the drivers to the comp for 2015, like what are the categories that you expect to really lead this year as we look forward?

Yes, I mean in terms of the categories my suspicion is going to be the categories that we've seen doing well. We still expect active be very strong and the center core categories most notably handbags, cosmetics, beauty big ticket. So I think we're going to see a lot of continuation of what we have been seeing. Men's has been strong, shoes, etcetera, as we go into '15.

Got it. And how about just like general comments on the consumer?

Sorry about that, I forgot, didn’t listen your second question. I think that what's interesting is as we look back on '14 and we look at what we were expecting in terms of the economy. Our internal projections were right on the money in terms of inflation, GDP growth. Where they missed was GAF growth, general merchandise apparel and furniture and we actually were over a point -- we expect the GAF growth to be about a point plus higher last year than it turned out to be, and so as we look to '15 and interestingly in the fourth quarter we did see GAF growth beginning to strengthen which could bode quite well for '15 should that happen and in part due to the GAF prices and in part just to the how the momentum has changed. So that could be helpful as we go into '15.

Got it. And just give us any flavor on how February as gone for so?

We don’t comment on the month, I mean, obviously the weather has not been helpful, but hopefully it will be fine by the time we get through the quarter.

And we'll go next Matt Mckinley with Evercore ISI.

Good morning. You've a lot of moving pieces with the restructuring versus the investment in 2015 I know that the restructuring that you did this year was effectively reinvested but you expect those benefits to accrue pretty evenly or does that save and spend program you have way more to the back half with the investment that was kind of make the front of it little bit better and the back half a little bit worse?

I shouldn’t answer off the cuff, but I don’t think so. I mean I think we'll be making the investment throughout the year maybe a little bit or somewhat. Again the credit numbers are lumpy so that impact that capital little bit more; so hard to say. And then it always depends on the timing of the asset sales versus last year.

And then on the new initiatives I know that it is part of the test and learn and process for these new initiatives you're going to have some spending with associated with that. But as you've done these tests in the past, and I assume you do these sorts of things in your stores all the time, how long does that typically take to move something from a test phase to more like a primetime? Is that something you've done that takes nine months or is?

Testing theory would tell you we should wait a lot longer than we do. Retailers, as you know, are by definition impatient, so we do tend to react a little quicker than we probably should based on testing theory. So my suspicion is that this time next year you will hear about some things that we’ve tested this year that rolling out. For example SVI Single View of inventory was one of those. We did a little bit in the spring, more in the fall and we were just so excited at that we rolled it out to the company now. So I think you will see moving with some of these things for '16.

And from Stifel we'll go next to Richard Jaffe.

Given the aggressive CapEx and the entering of Phase III, could you talk about your internal thought process regarding investment and the return on invested capital both in terms of hurdles you would like to achieve and the timing you provide these new projects to achieve these?

No, that hasn't changed and honestly I'm not sure I would characterize a $100 million increase in capital as aggressive but we have very disciplined standards in terms of what we expect. We judge all of these investments on an internal rate of return basis that obviously as to for exceed the cost of capital. And then secondly, we look at a third and the fifth year returned on invested capital to make sure that all of that returned doesn’t happen way out. You hate to seek in value and when I call that terminal value. And I think we have a very good process in a disciplined process to look at that. And that is not going to change.

Very good. Thank you.

And from Telsey Advisory Group we'll go next to Dana Telsey.

Can you a little bit as you think about the new growth opportunities, acquisition, new concept, international, is there preference in terms of capital allocation and how you are thinking of return to the different opportunities? And on the pick order online and store and same day deliver how do you think of same day delivery emerging as we go through 2015? It certainly seems like the speed of getting customer things faster is becoming even more important and popular.

Well I think you are right about the same day deliver particularly in the bigger markets like Manhattan and San Francisco that's where you are going to see that, but I do think people want to receive their orders quicker and, frankly, that's where our store network is been so helpful. If you need something day and you are in a market it doesn’t have same day deliver yet the online pick-up and store helps with that or even next day. And by having inventory closer to the customer that's a huge competitive advantage for us in terms of satisfying what the customers are looking for. So I see that's going to continue to be important and more obviously focused on that. Your first question in terms of prioritization I would say right now we don’t really have a prioritization we’re looking for the highest returns we can get on the capital that we are going fast and we’re also looking in these new initiatives of how it will impact the base business. So one of the great things about Bluemercury for example is not is it going to be a great business in and of itself and they will expand and generate a great return on the acquisition. But also we believe it's going to help the core business, both in terms of the shops that will open in some of the Macy's stores as Bluemercury, but also frontally just learning about the beauty business will obviously help us as we go forward. So love the idea of these new growth ideas not only been great in and of themselves but also building off the base business and helping there.

And we'll go next to David Glick with Buckingham Research Group.

Thank you, Karen. Just a follow-up on the off price opportunity just to clarify, do you envision this new opportunity as more the traditional off price retail channel versus the strategy that Bloomingdale's is pursuing as an outlet strategy? And then what are the core competencies that you think you can leverage from the Macy's organization whether its brand relationships, the Macy's, name private brand development to bring value to this new initiative?

Yes, the Macy's will be more likely you are calling traditional, obviously, in the outlet world we have Bloomingdale's. So there was no reason to create Macy because we are also expanding the Bloomingdale's outlet concept. So we didn’t want the competition between the two directly. And you listed a lot of the reasons why we think we have advantages in the off price business, the marketing prowess, obviously the way we were in stores the relationship with vendors, the private brand and on and on.

And do you think that has an impact on you concern that it might have an impact on your base business, obviously the beauty initiatives you can see the synergies, how would this initiative help your base business?

We think it may just because it may help in the whole new customer to Macy's. One of things we found with the Bloomingdale's outlet business, initially we were nervous about putting one of the Bloomingdale's outlet too close to a Bloomingdale store. And what we’ve found is that served as an entry point for the customer and instead of taking business away from the base Bloomingdale's store we actually brought new customers who learned in the comfortable with Bloomingdale's outlet experience and then went to the Macy's store. So it's very profitable we could find that Macy's as well.

Great. Thanks for the color. And just a housekeeping item what's the dollar sales of the closed doors that you are closing in 2015 or the volume from 2014?

I don't know that off hand and we can comment on that later. But be careful because the difference between comp and total in '14 is a store closures but it's also the reduction of our private brand sales to [indiscernible] which we can really agreed to not do going forward. So it's not all the store closures.

And from Credit Suisse we'll go to Michael Exstein.

Couple of things one is where is the Blue Nile acquisition cost, is that going to be part of CapEx or is a separate item?

It's Bluemercury.

Bluemercury side.

Not Blue Nile. Look Bluemercury and my suspicion is it will be a separate item. And that's not part of the $1.2 billion.

And then the other thing it noticed in the press release today is there a bunch of store consolidations where you had multiple units in one mall, you consolidated down to either one or two additional units in the mall. Is that part of an ongoing program? How many store opportunities potentially is there to cut down the numbers of stores you are operating in the same mall?

Yes, I mean that has been something we've been doing on an ongoing basis where it makes sense. So that’s not new we've been doing those but yes that is important [indiscernible] seeing what the right square footage, in some cases for example at Bridgedale we expanded the base store so we exposed one we actually expanded the other store but it's obviously more efficient as a one store opportunity.

And then do you have any thoughts in terms of the trends in the industry to these headquarter supply stores that some of your competitors have begun to invest heavily in?

Well we have them and we've been investing for years, I mean that’s not new for us.

We'll go next to Laurent Vasilescu with Macquarie.

I believe in the January press release you've outlined that in 2014 about $1 billion direct to consumer shipments originate directly from stores, that’s a pretty big number, can you possibly shed some light on how that grew year-over-year and how that portion of business contributes to the company's margins?

I don’t know how to answer the margin question we wouldn’t break it up separately but as I said a little while ago its obviously very important to us to be full filling from stores because we can get gods to the customer a lot faster that way and also we don’t have to build as many mega centers. Now there is obviously a lot of analysis and complicated algorithms to decide the right way of shipping what from what place but store fulfillment is a very important part of our equation going forward and we'll continue to grow aggressively.

And any color on what categories are driving that business?

Which store fulfillment?

Definitely.

It [indiscernible] means the whole stores whatever we carry.

Okay. Thank you.

And we'll go next to Alexis Gold with HG Vora.

Hi, just a quick follow up just want a clarification, actually there is Bloomberg headline out right now that says that you will not be aggressive in stock buybacks and what I heard you say was just repeat the [indiscernible] we don’t give specific buyback number you can expect a [indiscernible] continue…

That’s correct, yes thank you for asking that, as I can see the headlines so yes, thank you for clarifying that.

No, great thank you very much.

No, sorry about that.

And at this time there are no further questions in the queue. I'll turn the call back to you Ms. Hoguet.

Well thank you all very much and we appreciate your interest in Macy's. Obviously don’t hesitate to call Matt, Sarah or me if you have further questions or need further clarification on any of this. And as I said earlier we look forward to updating you on our progress in the upcoming quarters and obviously years ahead and remember change your calendars 9 'O clock going forward for these conference calls. Thanks very much and have a good day.

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.