Macy's, Inc.
Q1 2007 Earnings Call Transcript

Published: 16 May 2007

[Operator:]

Good morning and welcome to the Federated Department Stores first quarter 2007 earnings release conference call. I would now like to turn the call over to your host, Ms. Karen Hoguet. Please go ahead, ma'am.

[Karen Hoguet:]

Thank you. Good morning and welcome to Federated's call scheduled to discuss our first quarter earnings. 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.fds.com, beginning approximately two hours after the call concludes. Please refer to the investor relations section of our website for a discussion and reconciliation 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. This was a disappointing quarter, due to the weaker than expected sales. However, we were pleased that our earnings per share were within our guidance, in spite of the lower sales. In February and March, our comp-store sales were only slightly lower than what we had expected. However, in April, the gap to our expectations was wider. Also in February and March, the weakness was focused on the new Macy's or the former May doors and the home business, particularly furniture. However, in April, the weakness was more widespread and included apparel areas in both the former May as well as the legacy Macy doors. It is hard to say how much of the April weakness in apparel was due to weather, but clearly it was a factor. In early May, apparel sales have rebounded somewhat, but we need more time to judge the underlying trend. For the quarter as a whole, sales were $5.9 billion versus our expected $6 billion to $6.1 billion. The sales performance was good during the first quarter in the legacy Macy doors in spite of April, at Bloomingdale's and online. We opened six new stores in the first quarter, five Macy's and one Bloomingdale's. During the quarter, our business was strong in dresses, juniors, handbags, shoes, young men's, luggage and mattresses. Also, the more contemporary looks in ready-to-wear and men's both sold well in the quarter. The weakness businesses in the first quarter were furniture, all of the seasonal businesses, as well as the traditional moderate businesses, including structured career looks. We remain confident that our strategies are right and our execution is on track. We have dug into the details of the business, as you would imagine, trying to figure out what, if anything, we need to do to improve the trend. As we examine our business in the former May doors, we do see customers responding positively to so many of the new parts of our assortment

[Operator:]

(Operator Instructions) Your first question comes from Deborah Weinswig - Citigroup.

[Deborah Weinswig:]

Good morning, Karen. In terms of the new Macy's doors, can you just talk about or help us maybe understand in more depth what is different versus your original expectations? Traffic, ticket, categories of performance, just anything else that we can use to help understand?

[Karen Hoguet:]

I think it's primarily a traffic issue. The average unit retail is going up significantly in those stores, maybe a little slower than we would have thought. But I think the bigger issue has been traffic, and it has been a whole lot weaker in the Home Store than the rest of the store in terms of our business. That's why, as we think about more public advertising, we think that will help draw people into the stores.

[Deborah Weinswig:]

I'm not sure how much color you can give us around the performance of Bloomie's. We've seen such amazing performance out of competitors such as Nordstrom's which is probably the closest publicly traded competitor. How should we think about your performance versus the competition and what opportunities exist there?

[Karen Hoguet:]

If you looked at Bloomingdale's excluding Home, they look very comparable to the competition. So their performance has been strong although they, too, have had weakness in home; that hasn't just been with Macy's. But from an apparel and accessories perspective, their numbers look like the competition. So we continue to feel very good about Bloomingdale's. As you know, Bloomingdale's has opened quite a few new stores, most notably downtown San Francisco last year; San Diego; Chestnut Hill in Boston; South Coast Plaza, which opened during this quarter; and then Chevy Chase opens later this year. All the stores that have opened have opened very strong, and we feel very good now about the expansion potential for Bloomingdale's. So I think those plans could develop over the next, say, six to 12 months.

[Operator:]

Your next question comes from Michelle Clark - Morgan Stanley.

[Michelle Clark:]

Good morning, Karen. Can you tell us if you're seeing regional differences in performance across those new Macy's locations, presumably given a more challenging macro environment in the Midwest?

[Karen Hoguet:]

That's absolutely not the case.

[Michelle Clark:]

You're not seeing Midwest stores, the new Macy's stores, perform below new Macy's stores in other regions?

[Karen Hoguet:]

Correct. That is absolutely not the case. Unfortunately, we're seeing weakness pretty much across the board; there's no regional difference.

[Michelle Clark:]

Can you provide us with some insight into inventory levels, both at the legacy Macy's doors and the new Macy's doors?

[Karen Hoguet:]

Yes. Whenever you have a weak apparel month like April, there are going to be some pockets of inventory that is too high. But in total, we're pretty comfortable with our inventory levels and as we move through the second quarter, we'll be able to liquidate the inventory we need to liquidate. So there's really no concern in terms of the inventory levels.

[Michelle Clark:]

Great, and then one last question. What assumptions are you making in terms of consumer strength in the back half of the year?

[Karen Hoguet:]

I don't know exactly how to answer that, but the original numbers assumed that there wouldn't be any economic weakness relative to the first half of the year. As we've looked at our plans and again, given April, there's enough good news offsetting the bad news that we're still comfortable in total with the number, but we will continue to watch trends, obviously, very closely.

[Operator:]

Your next question comes from Charles Grom – JP Morgan.

[Charles Grom:]

Hi, Karen, thanks. Could you elaborate a little bit more on the public advertising change, and what it's going to involve and whether or not it will come at the expense of other marketing vehicles?

[Karen Hoguet:]

Most of it will come at the expense of other marketing vehicles. Some of it, I suspect, will end up being incremental in terms of advertising spend, but most of it we will offset elsewhere.

[Charles Grom:]

So what vehicles will it come at the expense of? Like some of the couponing?

[Karen Hoguet:]

No, no, no. It will be public as opposed to private sales, and it will be more television, obviously, as we are trying to drive customers into the store.

[Charles Grom:]

Thanks. Could you elaborate a little bit more on what you're seeing in the month of May; I know it's only two weeks in, but maybe by product category or geographic region, that gives you a little bit more convection?

[Karen Hoguet:]

No, we don't comment mid-month.

[Charles Grom:]

One last one on gross profit margins, as you said, they were up better than expected. Can you walk us through the three or four drivers and how sustainable they are?

[Karen Hoguet:]

One of the biggest factors was last year we had a very disappointing gross margin in the first quarter, which, by the way, was the opposite in the second quarter. We had very good margins last year in the second quarter. So keep that in mind as you are modeling. I do not expect much, if any, probably not at all, an increase in gross margin in the second quarter. In terms of what happened in the first quarter, most of it is just year-rounding on weakness last year. The continued strength in the business in the legacy doors has helped gross margin.

[Charles Grom:]

One last one if I could, on the merger integration, I believe you said on the last call $100 million to $125 million for the full year and I think you said 50% of that would be in the first three months of the year, which really didn't materialize. Can you give us a little bit of sense for the cadence on that line for the rest of the year?

[Karen Hoguet:]

Well, what we said is almost all of that expense will happen in the first half of the year. There will be some small numbers in the back half, but most of it should happen, certainly, by the fall season.

[Operator:]

Your next question comes from Adrianne Shapira - Goldman Sachs.

[Adrianne Shapira:]

Thank you. Karen, can you talk through some of the planned increases on expenses that offset some of the cost savings, maybe the size of it, and perhaps drilling down on the investments on selling expense? It seems as if the payback is not happening because we are not seeing big positive results in the top line. Could you maybe help us ?

[Karen Hoguet:]

You don't know what the top line would have been, had we not done it. So I don't think it's fair to conclude that hasn't been the case. In dollars, by the way, on selling, what happened is when sales didn't happen, we didn't cut selling expense at the same rate. So it's not that we're spending more dollars in selling, we just didn't cut it as dramatically to maintain the same selling expense as a percent of sales in the first quarter. The biggest error, if you want to use the word error, that I've heard as I've talked to investors and analysts over the last couple of weeks on SG&A is forgetting the fact that we sold the May credit business midyear last year, and that has a significant negative impact on SG&A . In addition to that, obviously, depreciation is forecasted to be higher, as well as the one-time cost associated with the new stores and the direct-to-customer facility. Those are really the big items.

[Adrianne Shapira:]

Just going forward on the selling expenses, can you give us a sense of where you're planning? Obviously, now that you adjusted comps down slightly in the second quarter, similarly the selling expense has moderated?

[Karen Hoguet:]

As we said when we reported the fourth quarter, we expect SG&A rate to continue to go down in the second quarter but by less than in the first quarter so that would not change; and as we move to the back half of the year, little if any improvement.

[Adrianne Shapira:]

Talking about the efforts to drive traffic, it sounds as if it's going to be a little bit more promotional, especially on the home. Talk about the margin implications to that?

[Karen Hoguet:]

It is going to be a little more promotional, and we think we factored that in as we've looked at our margins for the second quarter.

[Operator:]

Your next question comes from Dana Cohen - Banc of America Securities.

[Dana Cohen:]

First, on the second quarter, the guidance assumes no spread between comp and total. Why should that be, with the new stores coming on?

[Karen Hoguet:]

That's not true. I think it's rounding, Dana.

[Dana Cohen:]

Just in terms of just going back on this SG&A, given the fourth quarter performance, you had the issue with the credit card in the fourth quarter. It would seem to me it has to be the other issues which are the delta coming into Q1. Is that a fair way to look at it?

[Karen Hoguet:]

I'm not sure I understand.

[Dana Cohen:]

Well, if you sold the May card in the second half of last year, it would have hit you in Q3, it would have hit you in Q4, so that's not different.

[Karen Hoguet:]

That's not an issue in the back half of the year. That's only an issue in the first half of the year. In the back half of the year, we had a spectacular fourth quarter SG&A, and it's going to be hard to beat it.

[Dana Cohen:]

But what I'm saying is in Q4, your SG&A dollars were down $275 million despite the May credit card issue. So the rate of change between Q4 2006 to Q1 2007 can't be the credit card; that's the same issue. It has to be incremental stores and all the other things you talked about. So, as we think now going into Q2, that has to be the same, plus it sounds like you are going to spend more on marketing.

[Karen Hoguet:]

I'm not following you with the fourth quarter to the first quarter; I'm not quite sure what you're saying. But factually, you're correct, the SG&A in the fourth quarter would have been negatively impacted by the credit sale, so that the performance was even stronger than what you might have thought, had you forgotten that.

[Dana Cohen:]

Then as we go Q1 to Q2, you don't have the expenses for the six new stores. But on the other hand, it sounds like you're going to be spending more on marketing.

[Karen Hoguet:]

At this point, I don't know if it's going to be incrementally more or covered elsewhere. That's potentially the case, but it's not huge dollars.

[Dana Cohen:]

Just help us think conceptually about what this new marketing means. It sounds like you want to drive sales, but on the other hand, is this going to be more promotional types of events than what you would have done with the credit cards? I just want to understand just conceptually how you're thinking this through.

[Karen Hoguet:]

Some events that might not have been with advertising on television will now have television. In other cases, it was going to be a proprietary cardholder event, which will now be public. Those would be the kinds of changes that would happen.

[Dana Cohen:]

So does that mean that it's a more expensive type of event to the P&L?

[Karen Hoguet:]

It depends on the sales. It depends on the incremental plus sales you generate.

[Dana Cohen:]

I'm talking on a rate basis. It sounds like it's probably a lower margin.

[Karen Hoguet:]

No, not necessarily. Again, it depends on how much incremental business you drive. Advertising more than covers itself; it's a question of to what degree. So you can't judge that until after the fact.

[Dana Cohen:]

You are not assuming in Q2 that gross margin is going to be down?

[Karen Hoguet:]

I'm not assuming it's going to be up. We'll see as we get through the quarter.

[Operator:]

Your next question comes from Stacy Turnof - Merrill Lynch.

[Stacy Turnof:]

Good morning, Karen. Could you comment a little bit more about the friends and family promotion on your business? I know it's only been a week or two since sales were reported, but any better data on why it wasn't as successful as you had anticipated?

[Karen Hoguet:]

Well, we have all kinds of theories, but I don't know that we know definitively. So I really don't think I should answer that, since there's nothing definitive.

[Stacy Turnof:]

Was there a difference between the May stores and the Federated stores?

[Karen Hoguet:]

It didn't do great either place.

[Stacy Turnof:]

Could you update us on where you are in credit card penetration at the May doors? I know it was, I believe, at 41% at the end of 2006.

[Karen Hoguet:]

Yes. In the first quarter, the May store penetration was 44.1%, up 740 basis points over a year ago and 370 basis points better than what we had expected. So it still is 180 basis points below the legacy doors, but it did improve significantly.

[Stacy Turnof:]

How much did private label go up this quarter at May, or was it pretty much at that 17%, 18% rate?

[Karen Hoguet:]

It was pretty much at the same rate.

[Operator:]

Your next question comes from Hillary Morrison - Lehman Brothers.

[Hillary Morrison:]

When you look into this fall and begin to anniversary the launch of new Macy's stores, what percentage of your mix we'll comprise of new brands compared with last year? Specifically, can you give us a sense of what percentage of new brands will be private label and what percentage of branded products will be different than what was initially launched in new Macy's?

[Karen Hoguet:]

I don't know the answer to that, but I don't know of any big changes, other than the Martha Stewart launch.

[Hillary Morrison:]

Also, are there any initiatives you have to improve the Home business?

[Karen Hoguet:]

Well, one of them we've been talking about, which is the promotion and the public advertising. That's the biggest.

[Operator:]

Your next question comes from Bernard Sosnick - Oppenheimer.

[Bernard Sosnick:]

Hi, Karen. I'm curious about the weakness across the board in moderates.

[Karen Hoguet:]

No, I said moderate traditional.

[Bernard Sosnick:]

It wasn't across the board.

[Karen Hoguet:]

No.

[Bernard Sosnick:]

So in the moderate you would have your private brands, which you say have been doing well and have been well-accepted at the May doors.

[Karen Hoguet:]

Yes. Things that are more unique, more fashionable, are selling better now. It's the traditional basics that are not doing well.

[Bernard Sosnick:]

Now, historically you have always excelled, as May did, at battening down the hatches with expenses when the economic climate was murky. I'm sure you're doing quite a bit of that at present. Or is it not really the case? Because if you're increasing advertising, I would imagine you're doing quite a bit to cut expenses elsewhere.

[Karen Hoguet:]

That's correct; we are. Federated historically, as you know, is very good at adjusting inventory plans as well as expense if we thought business was tough; much harder to do, by the way, in the third month of a quarter, when it gets a lot tougher. As we broadened our comp guidance and lowered it a bit for the second quarter, you better believe we are all over that expense and receipt subject.

[Operator:]

Your next question comes from Christine Augustine - Bear Stearns.

[Christine Augustine:]

On the SG&A, will you have any additional startup costs for the online business for the rest of the year? How about preopening, or is that just in the first quarter?

[Karen Hoguet:]

There's only one; there's two furniture stores, and then the Bloomingdale's Chevy Chase store opens in the fall, so there's not a lot left on that. In terms of the preopening expense, obviously the distribution center has opened. But until we start using it full bore next year, there's some negative leverage. So it is costing us something in terms of SG&A throughout this year.

[Christine Augustine:]

On the 80 stores which you initially planned to divest, how many do you have left?

[Karen Hoguet:]

I don't know. It's not a huge number, and I'll check and get back to you.

[Christine Augustine:]

But the issues there, correct me if I'm wrong, are just there's some leases that you are trying to negotiate on?

[Karen Hoguet:]

There's a certain number of stores that are closed, and that we're working on real estate deals to sell. There's also a handful of stores where we have operating covenants, and so we're continuing to operate two stores in a mall. There's some of those being resolved as we speak, but there are still some of those. Interestingly, in some cases, for example, the Houston Galleria where we now have two stores, both stores have done very well. So we are rethinking even, do we want to sell the second box, since they are doing well with, by the way, duplicate assortments.

[Christine Augustine:]

Wow. My final question is on furniture. Just thinking about that business over the next few years, you are obviously committed to it at this point. But is it up for debate as to whether or not you should be in that business at all?

[Karen Hoguet:]

No, it's not up for debate. We think it's a business that we have a competitive advantage with. We obviously have not proven that to be very beneficial over the last couple of years. But we think we knew some of the problems, and we do think it's getting a little bit better, based on orders that have been written but not delivered yet. But we'll see.

[Operator:]

Your next question comes from Liz Dunn - Thomas Weisel Partners.

[Liz Dunn:]

My question relates to gross margin. Can you just talk about some of the drivers of the gross margin strength and gross margin performance at the new Macy's doors? Then related to that, one of your vendors indicated that their retail partners are requiring higher margins. Can you discuss that?

[Karen Hoguet:]

I don't know the margin in the May doors versus the Macy doors, so I can't really help you on that. I don't know what vendor you are referring to.

[Liz Dunn:]

Liz Claiborne.

[Karen Hoguet:]

I don't think they've said we're requiring higher margins. We're requiring higher margins than their product has been producing. But it doesn't mean higher margins from what we've always expected.

[Liz Dunn:]

Okay, interesting. Their press release just said retailers are demanding higher margins.

[Karen Hoguet:]

Well we are than what they have been producing.

[Liz Dunn:]

Okay, not historic levels?

[Karen Hoguet:]

Correct.

[Liz Dunn:]

Do you think that is an opportunity over time? I mean obviously, you're moving more of your business to private-label, and that produces stronger gross margins. Is there a thought that maybe the vendors might need to keep up with some of those increases?

[Karen Hoguet:]

What the vendors have to do is produce product that sell and has a good sell-through. I'm much more focused and we're much more focused as we are working with vendors on that issue, rather than having huge increases in gross margin rate.

[Operator:]

Your next question comes from Michelle Tan - UBS.

[Michelle Tan:]

First, as we think about the expenses that you are cutting related to the synergies, is there any lumpiness in how those were historically incurred over the course of the year? Or was it a relatively even distribution when you were incurring those costs between first quarter versus fourth quarter?

[Karen Hoguet:]

That's something I don't know the answer to that. My guess is it was not lumpy, but I don't know that.

[Michelle Tan:]

Then also, it seems like the specialty retail sector has been very promotional in this first quarter, as you mentioned some of the weakness that we saw in April. Any sense of whether that had an impact on your business and the promotions that you had to use in first quarter?

[Karen Hoguet:]

I don't think so. I had not heard that discussed at all.

[Operator:]

Your next question comes from Rob Wilson - Tiburon Research.

[Rob Wilson:]

Karen, thank you. You talked about gross profit margin being flattish in Q2. Can you talk about the back half of the year?

[Karen Hoguet:]

For the back half of the year, we are not expecting dramatic increases. My guess is it will be flattish for the remainder of the year. We still are in the process of all the detailed planning for the back half, but that's my best guess today.

[Rob Wilson:]

That’s helpful. Also, the May integration costs, can you tell us what those were in Q1?

[Karen Hoguet:]

$36 million.

[Rob Wilson:]

Yes, but what is that

[Karen Hoguet:]

I apologize. I don't have that breakdown in front of me. My guess is it had to do with some severance costs, some write-downs of properties. If you want, I'll get that list and get back to you.

[Rob Wilson:]

Okay, and we're going to see more of that going forward?

[Karen Hoguet:]

In the second quarter, primarily, and with just a smattering in the fall season.

[Operator:]

Your next question comes from David Glick - Buckingham Research.

[David Glick:]

Good morning, Karen. As you navigate the next three quarters, clearly it's tricky. You're confident in the second half, cautious in the second quarter. I'm wondering if you're differentiating your approach in the second half in Q3 versus Q4, whether maybe you are pulling back on your internal plans in Q3, whether you're taking the same approach to advertising and managing SG&A in Q3 versus Q2, just to keep yourself locked and loaded for the important fourth quarter?

[Karen Hoguet:]

Well, we are always trying to protect the fourth quarter. But we've got a lot of good things in the third quarter, most notably the Martha launch. So I think we're looking at both quarters as opportunities.

[David Glick:]

But are you changing your approach to going with more public versus private in Q3, or are those plans still under review?

[Karen Hoguet:]

Those plans are under review, but we're not looking at it differently between three and four, at this point.

[David Glick:]

So is it fair to say that you're going to look at the response you get in the Memorial Day timeframe, into June, and course-correct from there?

[Karen Hoguet:]

Correct.

[Operator:]

Your next question comes from Michael Exstein - Credit Suisse.

[Michael Exstein:]

Did you take any markdowns or begin accruing more aggressively for markdowns in the first quarter as you get ready for the second quarter to clear the inventory? Is it possible that you don't need as many overlap stores in places like Southern California and Boston as you once thought, from the way the trend of the business is going? The third one is Women's Wear ran a story yesterday about an experimental mall that you're going to be participating in at Wilmington. I was just wondering what the details were on that.

[Karen Hoguet:]

Let me go backwards, and I already forgot the first one. But the last one, on Epicenter, it was a Lord & Taylor box we had. So we, in essence, are letting them put this in that property, and in return for that we get a small participation. So it really was just the use of a Lord & Taylor box for that. In terms of the overlapping markets, at this point, no, we don't think that there's an opportunity to reduce the number of stores we have in any of the overlapping markets. The stores are not doing that badly, Michael, that we would reach that conclusion. As you know, we pretty aggressively review underperforming stores. At this point, that's not the case.

[Michael Exstein:]

Finally, in terms of accrual for markdowns?

[Karen Hoguet:]

The way our markdown process works is that we are taking markdowns on a regular basis on what is selling. So yes, we took a lot of markdowns in the first quarter to get the inventory in shape and in the right aging categories for the second quarter. So we did take a lot of markdowns.

[Michael Exstein:]

Did you up the accrual attached to that in the first quarter?

[Karen Hoguet:]

What do you mean, accrual?

[Michael Exstein:]

Are you accruing markdowns?

[Karen Hoguet:]

No.

[Operator:]

Your next question comes from Jeff Stein - KeyBanc Capital Advisors.

[Jeff Stein:]

On the marketing spend, let's say for the balance of the spring, that you are ramping marketing spend. Are you going to be focusing on any specific segments of the store? For example, are you going to be advertising home?

[Karen Hoguet:]

It will be both total store and home.

[Jeff Stein:]

With regard to the $450 million cost save synergies, that has been a fairly solid number for quite some time, and I'm wondering at this point, is there any upside to that number that you might be willing to quantify?

[Karen Hoguet:]

As you get farther away from the time of the acquisition, tracking that $450 million exactly becomes more difficult. In the key overhead areas where there's going to be synergies, all of that is pretty much behind us. So there's really not going to be an update. To the degree it was higher, there have been offsets. So again, at this point, I would focus on our overall SG&A guidance to help you model the rest of the year.

[Operator:]

Your next question comes from John Barrett - Columbia Management.

[John Barrett:]

A follow-up on gross margins and the strength you saw, up 100 BPS. Your answer was interesting, that it was mostly coming from legacy Macy's. But it seems to me that last year you had peak promotions at former May doors. It seems to me that it was peak liquidation about a year ago.

[Karen Hoguet:]

No, wait a minute. No, no, no. I don't think you understood my answer or I said it incorrectly. What do you think I said about the gross margin?

[John Barrett:]

That most of the improvement came from strength at legacy Macy's.

[Karen Hoguet:]

Sorry, that's not the case. You are right that a lot of the margin improvement was from the May doors, where we were liquidating last year. But the legacy Macy doors did very well in margin as well and did improve. Sorry, I was not clear there.

[John Barrett:]

That's helpful.

[Karen Hoguet:]

Sorry about that. No, it's my fault.

[John Barrett:]

Just within that, how much of it was better mix?

[Karen Hoguet:]

I don't know the answer to that.

[John Barrett:]

The shrink levels, did they improve sequentially from Q4?

[Karen Hoguet:]

Well, remember, we take inventory in January. So until then, it's an accrual.

[John Barrett:]

Any comment, if you can, on credit trends? I know it's outsourced now, but credit trends within your portfolio? Do you see any sequential deterioration, Q1 from Q4?

[Karen Hoguet:]

At this point, no, not really. I have to say it's still hard to judge, because a year ago we were transitioning a lot of the processing to Citi. So to some degree, changes that happened in that transition may be masking other trends, but at this point we're not seeing much at all.

[Operator:]

Your next question comes from Dana Telsey - Telsey Advisory Group.

[Dana Telsey:]

Good morning, everyone. Karen, can you give us an update on the progress on localization of merchandise and assortments? Where do you see yourselves there, and how is it going? Last call, you talked a lot about training of the sales associates. How is that proceeding? Any further updates on the integration of the logistics network?

[Karen Hoguet:]

In terms of the localization of the assortments, that is just an ongoing process that we're getting better and better at, but still have a long way to go. But there's really no update on that subject. What was your second question?

[Dana Telsey:]

Training of sales associates.

[Karen Hoguet:]

That has been proceeding, and that is just going to be ongoing and training and retraining. So obviously, it sure doesn't look like it impacted sales in April. But as I mentioned earlier on the selling expense, don't know what it would have been, had we not done it. But we'll continue to train and retrain there. In terms of the logistics network, we're continuing to make progress in consolidating the warehouses, but that is not done yet, at this point.

[Operator:]

Your next question comes from David Rivera - Jennison.

[David Rivera:]

Let me ask the question about SG&A a different way. Your guidance is for SG&A rate to go down less than the Q1 rate in Q2, and potentially not much at all in the second half and particularly the fourth quarter. Given that I guess the run rate of savings should be increasing at this point, why isn't that disappointing to company management?

[Karen Hoguet:]

Why should the run rate be increasing?

[David Rivera:]

I think you entered $175 million last year. You had a run rate of $450 million for this year. I'm of the naive mindset that if you are actually saving that money, we should be able to see more of it through the P&L; it's not really savings if you spend it all back.

[Karen Hoguet:]

No, except that you saw it in the second, third and fourth quarter last year. So the increment on this year is not $450 million. It's a much smaller number.

[David Rivera:]

No, but if you are at a run rate, you should have some benefit.

[Karen Hoguet:]

No, not as you get in the back half of the year. There's not much at all.

[David Rivera:]

Will the dollars at least be similar, so if the sales come in better than planned, then we get leverage?

[Karen Hoguet:]

Well obviously if sales do better, you will for sure see leverage.

[David Rivera:]

On a dollars basis, what sort of percent increase at all in SG&A would you be looking at in the back half?

[Karen Hoguet:]

Our detailed planning isn't done yet. I'd rather wait and do that when we do the second quarter.

[Operator:]

It appears that there are no further questions at this time. Ms. Hoguet, I would like to turn the conference back over to you.

[Karen Hoguet:]

Thank you all very much. Obviously, if you have more questions, call me or call Susan, and we'll do our best to get them all answered. Thank you.