Macy's, Inc.
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Good morning and welcome to Macy's Inc. Fourth Quarter Earnings Release Conference Call. Today's conference is being recorded. I would now like to turn the call over to your host, Karen Hoguet. Please go ahead sir.

[Karen M. Hoguet:]

Great, thank you. Good morning and welcome to the Macy's conference call scheduled to discuss our fourth quarter and full year 2015 earnings. I'm 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 and other SEC filings. As we announced in early January, we had a disappointing November/December. Fortunately, with the cold weather in the new year, business did improve in January, and we did better than expected at the time of our January announcement and earnings were stronger as a result. Comp owned plus licensed sales declined 4.3% in the fourth quarter and 2.5% for the full year. EPS on a diluted basis excluding store closing and restructuring-related charges for the quarter was $2.09 as compared to our most recent guidance of $1.85 to $1.90. And for the full year, EPS on that same basis was $3.77, down 14% from last year. During the fourth quarter, we've launched through our advisors the marketing of potential partnership and joint venture transactions for our real estate, both our mall-based stores and our four flagship stores. The demand has been very strong, which is encouraging, but it is premature to comment further at this point. I will now talk about our performance in the quarter and highlight some of the bright spots in an otherwise weak quarter and year. I will then talk about our outlook for the next few years as well as provide guidance on our key planning assumptions for 2016. So let's start with the fourth quarter. Sales in the quarter were $8.9 billion, down 5.3% from last year. And as I said a minute ago, on a comp owned plus licensed basis, sales were down 4.3%. Similar to the third quarter, we had approximately a 4% decline in the number of transactions, a 1% decrease in the average unit retail, and units per transaction were up about 1%. We've talked about overall weakness in our sales and particular weakness in the cold weather businesses, but we did have some categories that performed quite well in the quarter

[Operator:]

Thank you. We'll take our first question from Jeff Stein with Northcoast Research.

[Jeffrey Stein:]

Okay. Good morning, Karen, and thanks for all the detail this morning. I'm wondering if you look back on the fourth quarter, what factors in the company's view contributed to the sub-standard performance relative to your peer group? And what, if any, changes are you making to your merchandising strategy as you look to spring of 2016? And then, I've got one follow up.

[Karen M. Hoguet:]

I think part of the fourth quarter relates to our locations being more heavily skewed towards cold weather areas where there wasn't cold weather, and also our heavy reliance on tourist markets. So I think some of it is a mix issue, as opposed to our performance. But having said that, as you know, we are taking responsibility for some of the performance and clearly changing things as we go forward. I would say from a merchandising approach as we look forward, I think we've talked about some of what we're doing, vis-à-vis product. I just mentioned the idea around winning with distinctive product, and I think that's a big piece. So if you think about some of the focus areas, weddings, health and wellness, active, again, beauty, we've talked about some of those things already.

[Jeffrey Stein:]

Great. And a question on Backstage, did I hear correctly that you're only opening one store, one freestanding store this year? And if that's correct, were you disappointed at all with the performance of the six pilot stores?

[Karen M. Hoguet:]

It is correct that it's one store and I wouldn't say disappointed. We are trying to learn from these before we expand them more broadly. And again, part of the pilot is also testing in store to see where we think growth may make the most sense. So I would say 2016 is just a continuation of the learning.

[Jeffrey Stein:]

Got it. Thank you.

[Operator:]

Our next question comes from Matthew Boss of JPMorgan.

[Matthew Robert Boss:]

Hey, Karen. Good morning.

[Karen M. Hoguet:]

Good morning.

[Matthew Robert Boss:]

So on gross margins, prior to this year, the model was pretty consistent in the 40% range. I guess what provides you the confidence in some of the recapture that you're guiding to this year versus gross margins potentially just moving structurally lower for the space?

[Karen M. Hoguet:]

Yeah. Again, I don't expect to get back to the 2014 level all in 2016, but we do think last year, 2015, was an anomaly given the weakness in sales, and particularly in the fourth quarter with the seasonal categories. I mean, obviously, it was an unusual weather year, or at least we think it's unusual, and it just caused a tremendous amount of markdowns given the sales decline.

[Matthew Robert Boss:]

Great. And then just a follow up, you mentioned monitoring this recent rise in credit delinquencies? I guess just any additional color on what you think some of the underlying drivers are? And have you seen any or heard about any tightening of potential approvals or any tightening in lending to potentially expect?

[Karen M. Hoguet:]

Well, one of the positives for Macy's is that with our conversion to a new system, we actually have greater capabilities of granting credit. So I think in our case the opposite will happen this year, and I think that was part of the fourth quarter results, that we're able to better monitor customer behavior, and, therefore, were able to approve more new credit than we had anticipated.

[Matthew Robert Boss:]

Great. Best of luck.

[Karen M. Hoguet:]

Thanks, Matt.

[Operator:]

Our next question comes from Lorraine Hutchinson with Bank of America.

[Lorraine Maikis Hutchinson:]

Thank you. Good morning, Karen.

[Karen M. Hoguet:]

Good Morning.

[Lorraine Maikis Hutchinson:]

I wanted to follow up on the SG&A investments that you're making, maybe just some help with what the largest buckets are. Obviously you've done a very large restructuring and cost cutting, you have incremental real estate gains flowing through there, so it's a lot of investment for a year where sales aren't higher. So I was just wondering if you could just help us out with the magnitude of what those might be.

[Karen M. Hoguet:]

Sure. Yeah, I mean, the largest increases would be, in terms of the growth initiatives, would be in digital. As you heard me say, that business continues to grow very rapidly. And we not only need to invest in supporting that sales growth, but also looking forward, particularly, as I said earlier, on mobile. So I think there's a lot of investment being made in digital growth, which, by the way, is not all digital sales. Part of that is omnichannel investments, so the customers can easily go back and forth between stores and the Internet. So that's the biggest chunk, but also Bluemercury, Backstage, China, which were very small numbers in 2015. Again, we're investing to grow those for the long term, which I think you'd expect us to do. So, those would be where the biggest investments are.

[Lorraine Maikis Hutchinson:]

Thank you.

[Operator:]

We'll take our next question from Renato Basanta with Sterne Agee.

[Renato Basanta:]

Good morning, Karen.

[Karen M. Hoguet:]

Good morning.

[Renato Basanta:]

Thanks for taking the question. I just wanted to talk a little bit longer term here. So clearly some of the cost savings are a big driver of EBITDA expansion in 2016, but can you just help us think about the longer term 14% EBITDA target? Maybe if you can discuss the timeline to getting there that's sort of embedded in your plans. And maybe talk at a high level about comp levels, gross margin and SG&A progression over time that sort of gets you back to that 14% rate?

[Karen M. Hoguet:]

Well, I'm not sure I can give you a specific year-by-year. As we said, this year is sort of the year for resetting, and we're hoping that obviously our comp sales return to positive territory, at least by 2017. And so as that happens, that helps the SG&A leverage. And depending on the sales growth, obviously, will have an impact on how quickly we get to the 14%.

[Renato Basanta:]

Okay. Thanks.

[Operator:]

And we'll take our next question from Paul Lejuez with Citi.

[Paul Lejuez:]

Hey, Karen. How are you?

[Karen M. Hoguet:]

Morning, Paul. Good.

[Paul Lejuez:]

I'm just curious, on the Backstage opening, I'm just curious, what does it cost you open a standalone store? And what's the capital layout when you do one within a Macy's store? Also curious the amount of the comp base at base at any point to do that?

[Karen M. Hoguet:]

So let me start with – is your question why are we opening one more?

[Paul Lejuez:]

No. I'm just curious the costs to open your Backstage stores on a standalone basis versus what it costs....

[Karen M. Hoguet:]

When you open it in-store the capital is less, but there's also more cannibalization of the existing store. So the equation is different than when you open a freestanding. Interestingly with the freestanding stores, we have found no impacts on nearby Macy's, but obviously if you take 25,000 to 30,000 square feet out of a Macy's store there will be some impact on the store as you shrink the remaining store. So it is a different calculus.

[Paul Lejuez:]

Right. And do those stores come out of the comp base when you do one within a Macy's store?

[Karen M. Hoguet:]

No, because it's – no.

[Paul Lejuez:]

No major disruption. And then just curious on the store closings that were done at the end of 2015, what's your assumption for percent of sales you expect to transfer to another store or move online? Or do actually think closing those stores hurt your online business, which I think you've alluded to in the past?

[Karen M. Hoguet:]

Well, it varies by market depending on the density of other stores around it. So I can't give you a specific number, but we do expect to retain some sales, but probably less than what people might expect. Dot com typically we do worse when we close a store because as I've said repeatedly, this omnichannel behavior is very important for our customers, and if they don't have the store to browse in or return to, they often don't shop as much on macys.com. So that's an offset in terms of the retention we get from closing the stores.

[Paul Lejuez:]

Okay. Thanks, Karen. Good luck.

[Karen M. Hoguet:]

Thank you.

[Operator:]

Our next question comes from Paul Trussell with Deutsche Bank.

[Paul E. Trussell:]

Hi. Good morning, Karen.

[Karen M. Hoguet:]

Good morning.

[Paul E. Trussell:]

I apologize if I missed a few of the details earlier on real estate, so my first question will be to have you repeat it? Apologies for that, but just the details around the $235 million guidance for 2016, I believe you mentioned about $86 million or so of it is Brooklyn. And then could you talk about what the additional $150 million of asset sales, none of that is the bigger stores, is that correct?

[Karen M. Hoguet:]

Correct. Sounds like you heard it fine.

[Paul E. Trussell:]

Got it. Okay. I want to just clarify that. And in terms of your Top Door strategy, could you just speak to, at least at this point in time, how should we think about the comp performance of these stores that you are targeting now versus the rest of the store base? And how do you expect that to progress as you make some of these investments?

[Karen M. Hoguet:]

Well as you might expect, these stores are important to our sales and profit. And so again, we're hoping that they outpace the rest of the company.

[Paul E. Trussell:]

And then just lastly, in terms of the tourism impact, you mentioned getting hurt by 1 point in the fourth quarter. How do you expect that to progress over the course of 2016?

[Karen M. Hoguet:]

We'll have to see. I don't know at this point, obviously what that's going to be. If it continues, we've been tracking it on a two-year basis so that we understand that better, and we'll just have to see what transpires on that front as we get into the year. It could continue to impact us by 1 point. I don't expect it to be more, but it is possible that that could continue to be a headwind we continue to face.

[Paul E. Trussell:]

Great. Thanks for the color. Good luck.

[Operator:]

Our next question comes from Oliver Chen with Cowen and Company.

[Oliver Chen:]

Karen, good morning. Thanks.

[Karen M. Hoguet:]

Good Morning.

[Oliver Chen:]

Regarding next year, how are you thinking about inventories in terms of how you are planning them, relative to last year and what you're thinking there? And then also, as you have refocused these strategies to the next level of thinking about the customer and the environment, what are your thoughts on your speed and your supply chain and your relationships with vendors, and how you think about discounts and allowances, and just matching supply and demand as everybody gets faster and the customer gets faster, too, in terms of what they expect relative to when goods are shipped?

[Karen M. Hoguet:]

I think the key thing is, obviously we also are trying to get faster and working closely not only with our private brands, but also with the market to make us respond quicker, be more agile, and make decisions faster. So obviously our private brand group is leading the way on this, obviously because we are they. So it's easier to move faster. But I think our vendors are responding as well.

[Oliver Chen:]

Okay. Thank you. And are inventories also planned down throughout the year? Or is there a cadence in terms of potentially how you're thinking about it?

[Karen M. Hoguet:]

We are always trying to get parity between the inventory and the comp sales level, and obviously at the end of the year being up 0.7% is a little higher than what we're planning in the first quarter, so we'll have to see as the year goes on.

[Oliver Chen:]

Okay. And we had a question on your comments about less couponing and the markdown strategy, why do you think that worked, strategically? Like, what worked in terms of the customer really responding to this, just trying to understand how you tested it (42

[Karen M. Hoguet:]

I think what happens is, customers want simplicity. And when you are looking for deep clearance goods you could just see the price of the item and not have to do the math in your head, and it's easier. We've also segregated those goods and put them in a separate part of the floor, which I think that customer is responding quite well to also. And at the same time, the parent departments look even better and our hope is that regular price selling will improve because there's just less clutter on the floor by moving this clearance merchandise into a separate area.

[Oliver Chen:]

Thank you. And just our last question, we do think you have a competitive advantage with bricks plus clicks. But what would you highlight as you compete against Amazon and other pure plays as your key competitive advantages in the apparel market?

[Karen M. Hoguet:]

Well, I think a lot of it is, as I said is the store base and having the ability for customers to interact with us in different ways. The second, I think is our talent in the whole fashion arena, from picking, editing the assortments, presenting it, and the vendor relationships. I think that is a huge competitive advantage to date, vis-à-vis, Amazon. But I think it starts with the store base, and our understanding of the fashion customer, which is different.

[Oliver Chen:]

Thanks, Karen. Best regards, and thanks for all the strategy in detail.

[Karen M. Hoguet:]

You bet. Thanks, Oliver.

[Operator:]

We'll take our next question from Kimberly Greenberger with Morgan Stanley.

[Gregory W. Baglione:]

Good morning, everyone. This is Greg Baglione on for Kimberly.

[Karen M. Hoguet:]

You don't sound like Kimberly.

[Gregory W. Baglione:]

Just a question, Karen, you mentioned the leverage is about 15% higher than it was last year. Looks like cash balance is at a low, since like 2008. That, in addition to some of the real estate initiatives you have going on, just wondering how that may dictate the future share repurchase activity. And then I have a quick follow-up.

[Karen M. Hoguet:]

Well, obviously it all goes into the mix. We do, as you know, want to remain an investment grade company, and getting our leverage ratio back into the target area is important to us, again, primarily through EBITDA growth. But all of that will factor into the buyback this year.

[Gregory W. Baglione:]

Great. And then you mentioned e-commerce was strong in the fourth quarter. I was wondering if you could talk about the margin profile of that business in the fourth quarter. And as you think about longer-term, getting back to that long-term EBITDA margin goal, do you expect sort of a recovery in that margin profile of that business, or...?

[Karen M. Hoguet:]

Yes, there's a misperception that digital growth comes at a lower margin. That's not really the case. And again, there's lots of different transactions, whether it's shipped from store, shipped from warehouses, et cetera. But that is not a negative drag on our margins as we go forward. We love digital growth.

[Operator:]

We will take our next question from Joan Payson with Barclays.

[Joan Payson:]

Hi. Good morning, Karen.

[Karen M. Hoguet:]

Good morning.

[Joan Payson:]

Could you talk a little bit about the comp guide, and I guess what categories you expect improvement in? And also the composition, in terms of transactions versus AUR in 2016.

[Karen M. Hoguet:]

Yeah, I don't know how to answer that question, particularly the second part of the question. In terms of the comp, just because it's – my guess is there's going to continue to be pressure on traffic. But how that all works, I just don't know how to predict. In terms of categories for growth, we do expect to keep focusing on some of the categories we've talked about before

[Joan Payson:]

Okay, thanks. And then given the growth of online, how are you thinking about the right size of the store footprint longer-term, especially after closing these 40 stores recently?

[Karen M. Hoguet:]

Well, I think the key thing is we really do believe that omnichannel is the right answer. And so, by testing things, for example, the Backstage in-store as a way of driving traffic, some of the things that we're testing in the Top Doors in terms of incremental special appearances and makeovers, and all kinds of services that we can provide in the store – we are, again, hoping to build on that and make our store base even stronger.

[Joan Payson:]

Okay. And then just finally, we've heard this season a number of vendors beginning to talk about working to be less promotional and doing more full-priced selling, going forward. Has that changed the vendor discussion or relationship at all for you in particular?

[Karen M. Hoguet:]

No. We're having the same conversation.

[Joan Payson:]

Okay. Perfect. Thank you.

[Operator:]

We will take our next question from Stephen Grambling with Goldman Sachs.

[Stephen Grambling:]

Hey. Thanks for taking the question. Sticking with online, how much of the double-digit growth in the channel has been driven by broadening the assortment versus turnover of existing SKUs? And as a follow-up to an earlier question, how have you been approaching the profitability of online, on an item basis, as you have expanded the assortment?

[Karen M. Hoguet:]

The assortment – sorry, has been only expanded to more closely parallel what's in the stores, so most of the growth is coming from comp categories as opposed to expansion.

[Stephen Grambling:]

Great, that's helpful. And then on mobile, you mentioned that this will be a big investment. I think you said earlier it would be for customer-facing enhancements and improved functionality. What are some of these changes that we should be expecting? Or asked another way, what are some of the key feedback you receive from customers that are directing you in those changes?

[Karen M. Hoguet:]

Well, I think a lot of it has to do with the ease of shopping when you are on a mobile device, whether it be the mobile-enabled Web, or on our app. So things like a natural language search, we are looking to add different filters and facets, as you navigate, is a big one. Also trying to, what we call, optimize the purchase funnel, things like adding bag to check out and all kinds of things that just cleans it up and makes it easier to use.

[Stephen Grambling:]

Is it fair to say that it's all about conversion?

[Karen M. Hoguet:]

A lot of it is conversion. Actually, most of what I just said is, but there's some other things also to help traffic.

[Stephen Grambling:]

Okay. Thanks so much. I'll jump back in the queue. Best of luck.

[Karen M. Hoguet:]

Thanks.

[Operator:]

We will take our next question from Michael Binetti with UBS.

[Michael Binetti:]

Hey. Good morning, Karen. Thanks again for all the detail on the call today.

[Karen M. Hoguet:]

Okay.

[Michael Binetti:]

I'm trying to marry together two comments you made earlier. You mentioned that you were happy with the early results you're seeing, as you separate the clearance apparel to its own section and tweak the pricing strategy. Then you said your hope would be that you would see better full-priced selling in the remaining apparel section. Can you just talk about whether that's a trend that you are seeing early on or did you mean that that's a dynamic that's lagging so far? And if so (50

[Karen M. Hoguet:]

No, it was actually – well, we had a lot of debate and when we started testing it. I thought that regular priced selling would be much stronger, because it would be easier to see. Others thought regular-priced selling would get hurt, because the clearance customer would go to this clearance area and maybe not buy the regular priced while she was shopping for clearance. So far, it goes both ways. And there are customers like me, and there's other customers, and it's really offsetting. And there's really been no impact. So, overall, the results have been very positive, but I'm still hopeful. But again, that's just my bias that I think that regular price may help as we go forward. But there's been no negative, either.

[Michael Binetti:]

Okay. Interesting. Yes, some of the vendors, as Joan said, I think were talking about that a little bit. That will be interesting to see that roll forward.

[Karen M. Hoguet:]

It'll be very interesting, and that's why you test and you learn. And you try to just keep getting better at it.

[Michael Binetti:]

There was one mention in the press release that sounded maybe like some of the $400 million in cost saves started in the fourth quarter. Would you mind just talking to that $400 million of cost saves, and what the pace of that looks like through the year in 2016?

[Karen M. Hoguet:]

Yeah, no. The $400 million didn't, but the cost saves that we did last year were still rolling through in the fourth quarter. So, I would say the $400 million is probably three-and-a-half quarters where we will get that savings. For the first half of the first quarter, a lot of those savings haven't completely happened yet. But it will roll in, in full force sort of mid-quarter.

[Michael Binetti:]

Okay. And then if I could just ask one last one. A couple things you didn't mention is – would there be any potential benefit in the first half as you guys anniversary the West Coast port from a year ago? And then there was a bit of a blip with the buying reorg last year that caused some disruption; any chance that we see a benefit lapping that? Thanks.

[Karen M. Hoguet:]

Well, we have factored in some improvement in the first half as a result of the receipt disruption last year with the port strike. So we'll see if, in fact, that happens. But we have thought about that. And in terms of the impact of the restructure, that was something that we believe we felt through the whole year. So it wasn't just a first-half disruption.

[Michael Binetti:]

Okay. So that's minimum. Okay. Thank you very much.

[Operator:]

We'll take our next question from Michael Exstein with Credit Suisse. Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Thanks so much for taking my question. A couple quick ones for you, Karen, number one, any comments on the energy markets; a couple of your competitors have called them out. Secondly, you restated inventories in the fourth quarter. Can you give us the background on that? And finally, a strategic question

[Karen M. Hoguet:]

Well, in terms of the energy markets, they were not as weak as the West Coast, but obviously weather was less of a factor there. So weather was a standout for us, but we didn't do great in the energy markets either. Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Okay.

[Karen M. Hoguet:]

I'm not sure what you mean on the restated inventory? Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) The inventories on the balance sheet that you just published are slightly different than the one...

[Karen M. Hoguet:]

Oh, last year? Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Yes, exactly.

[Karen M. Hoguet:]

It was just a slight switch in our inventories between payables and inventory. So it's not a major factor. Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Okay.

[Karen M. Hoguet:]

And this year and last year are now restated to be the same. Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Okay. Thank you. And then...

[Karen M. Hoguet:]

Your last one is a hard question. This is one where we always try to get balance. We do think market share, and particularly comp growth, is important. But we also think doing so in a sustained, profitable way, with high returns, is also important. So that's where balance comes in. I will say, though, without comp growth, it would be very challenging to get to the 14% because of the fixed costs in the business. So I think they have to go hand-in-hand. Michael Block Exstein - Credit Suisse Securities (USA) LLC (Broker) Okay. Good luck, and thank you so much.

[Karen M. Hoguet:]

You bet. Thanks, Michael.

[Operator:]

We'll take our next question from Omar Saad with Evercore ISI.

[Omar Saad:]

Thanks. Good morning, Karen.

[Karen M. Hoguet:]

Good morning.

[Omar Saad:]

Following up on Michael's question, actually, on the comp, the importance of comp growth, can you rank order what you see as the key factors to your comp guidance for this year getting back closer to that flattish level from the – I guess it came out to minus 3%, minus 4% in 2015. And it's okay to put weather; weather is – a seasonable winter is one of the key factors. But just how you think about the importance of the different things needed to get back to the level.

[Karen M. Hoguet:]

Well, again, you're going from the minus 2.5% to the approximate minus 1%. I mean, I think that's the appropriate comparison. There are lots of scenarios that get us to the guidance that we're talking about that rank things differently

[Omar Saad:]

Got you. And then if I could ask, you made a comment at the very beginning of your prepared remarks about the importance – the right growing importance of browsing and researching online and mobile. Can you maybe talk a little bit about how you're incorporating some of the learnings there into the strategy, kind of the omnichannel strategy, and what are the key factors?

[Karen M. Hoguet:]

Yeah, well, I think the idea is – and we talked about mobile. As that becomes more important, how do we help customers get the information they need on their devices, whether it be product reviews, or even, in some cases, how to find their way through some of our bigger doors? So the better I think we make these mobile devices, the more we're going to get the interaction between stores and online to help our business going forward.

[Omar Saad:]

Do you find that the consumer who has spent a lot of time online researching and browsing behaves differently, once they are in the store? Do they...?

[Karen M. Hoguet:]

Some do, some don't. It depends. There's a lot of talk about people shopping and being more purposeful when they come in the store. Others are still doing sort of the old-fashioned shopping that we used to do, and often then going home and buying online. So there really isn't one answer. But we do find that, in our categories, having the store is a huge advantage, whether it be to check a color, check a size, spend an afternoon with your friends and shop. Or going for a service experience

[Omar Saad:]

Go you. Thank you, Karen. That's really helpful.

[Operator:]

We'll take our next question from Dana Telsey with Telsey Advisory Group.

[Dana L. Telsey:]

Good morning, Karen.

[Karen M. Hoguet:]

Hi, Dana.

[Dana L. Telsey:]

Hi. Could you talk a little bit at the Plenti loyalty program, how that performed, what you saw there? And lastly, any update on private label and the initiatives for 2016? Thank you.

[Karen M. Hoguet:]

Yes, Plenti is still early to really judge. As you know, we've got now over 11 million customers enrolled, which we think is very good. And we're beginning now to see people using their points, and coming into Macy's having earned their points in other retailers. But I think it's too early to really know how that's doing overall. In terms of private brand, obviously this is a major strategy for us, and it has been historically a huge strength of the company. And we are obviously investing to, in certain categories, move faster and make decisions quicker, and take some of the complexity out of the processes between our merchants and our product designers; and for some of the fast-moving fashion areas, to do all we can to keep taking time out of the system.

[Dana L. Telsey:]

Got it. And the Millennials floor in 34th Street looks a very good. What are you seeing for Millennials? And will that be replicated in any of the other stores? Thank you.

[Karen M. Hoguet:]

It's hard to replicate Herald Square in other stores. You're right; it looks fabulous and doing very well. But we are taking ideas from there and putting them in other markets. And part of it also is trying to mix experiences in with merchandise. So I think we learn from Herald Square, although you really can't replicate it, per se.

[Dana L. Telsey:]

Thank you.

[Operator:]

We'll take our next question from David Glick with Buckingham Research Group.

[David J. Glick:]

Thank you. Good morning, Karen.

[Karen M. Hoguet:]

Hi, David.

[David J. Glick:]

A question – one of your strategic planks is to win with distinctive product. And I'm just wondering how that lines up with a trend that we're seeing in terms of a lot of the brands – some of which that are key for Macy's, and are moving and embracing doing business with Amazon. And obviously without being brand-specific, how do you combat that? Are you looking to have a more styles, more brands exclusive to Macy's? And how do you combat that along with – a lot of these brands are capitalizing on consumers' desire to use Amazon Prime?

[Karen M. Hoguet:]

Well, I think what you've heard us talk about for a long time is trying to have more exclusive products within our stores, whether it be brands completely or private brands, or exclusive products from some of the key vendors. And that continues to be the case. We also hope that our organization continues to be the best at curating these brands, and continue to give the best assortments that we can.

[David J. Glick:]

And I had one follow up. What's the share count embedded in your EPS guidance assumption for 2016?

[Karen M. Hoguet:]

We don't give share count.

[David J. Glick:]

So – and then the buyback level?

[Karen M. Hoguet:]

You'll have to sort through that.

[David J. Glick:]

Okay. Thanks. Good luck, Karen.

[Karen M. Hoguet:]

Thanks.

[Operator:]

We'll take our next question from Brian Callen with Bank of America Merrill Lynch.

[Brian Callen:]

Hi. Good morning, Karen.

[Karen M. Hoguet:]

Good morning.

[Brian Callen:]

Given some of the downward movement in credit ratings in retail, and just the negative watch and outlook for Macy's, can you speak to some of the balance sheet limitations as you evaluate the partnerships or JVs with real estate? And then second, can we assume that your guided leverage range wouldn't be changing, and the intention is not have your rating fall to Baa3/BBB- (61

[Karen M. Hoguet:]

Yes we have stated, last fall and again now, being investment-grade is important to the company. And as I mentioned, our leverage ratios have fallen above – maybe the word risen above – our target range, and that we are expecting, with EBITDA increases, to get back into our target leverage ratio range.

[Brian Callen:]

Okay. And then I guess back on the, I guess any limitations you're feeling as you evaluate these partnerships or JVs?

[Karen M. Hoguet:]

Well, if you are willing to take on a lot more leverage, obviously that would change the dynamic. But there is some limitation because of our belief that being a retailer is it is important to be investment grade.

[Brian Callen:]

Okay. Thank you.

[Operator:]

We have no further questions in queue at this time. I'll now turn our conference back over to our moderator for any additional or closing remarks.

[Karen M. Hoguet:]

Thank you all for your interest. And obviously, follow up with Matt or me if you have any further questions that didn't get answered this morning. And thanks so much. Take care.

[Operator:]

This does conclude today's conference call. Thank you all for your participation. You may now disconnect.