Karen Hoguet, Chief Financial Officer

Deborah Weinstein, Citigroup Adrian Shapiro, Goldman Sachs Jeff Stein, Key Bank Dana Cohen, Bank of America Christine Augustine, Bear Stearns Bob Debral, Lehman Brothers Michelle Tan, UBS

Thank you. Good morning and welcome to the federated department stores conference call, schedule to discuss our Q4 2005 earnings. I am Karen Hoguet, CFO of the company. Any transcription or other reproduction of the statements made on this call without our consent is prohibited. The replay of the call will be available on our website, www.fds.com beginning approximately 2 hours after the call concludes. Please refer to the investor relations section of our website for discussion and reconciliations of any non-GAAP financial measures discussed this morning. Keep in mind that all forward looking statements are subject to risks and uncertainties that could cause the company’s actual results to differ materially from the expectations and assumptions mentioned today, due to a variety of factors that effect the company, including the risks specified in the company’s most recently filed form 10K and form 10Q. Before we discuss the numbers this morning I want to take a minute to talk about our other announcement made earlier this morning. To maximize the potential of the national Macy’s, we believe we need to take our marketing to an all new level. Since Peter Soxie became Federated’s first ever Chief Marketing Officer about 3 years ago, he has done a great job at working with our divisions to evolve to the Macy’s name and increasingly coordinate our marketing and sales promotion efforts across the company. Having worked in many divisions, including being president of what is now Macy’s Northwest, he has the ability to help transition to a more national approach to marketing. As a result of these efforts, plus now the addition of the May company stores, we are now ready to push even harder to establish Macy’s as a leading American consumer brand. We are so pleased that Anne MacDonald is joining our…

Our first question comes from Deborah Weinstein with Citigroup

Good morning Karen. In terms of the home store centralization, can you provide additional details in terms of what has happened vs. your expectations and what should we expect in 2006?

As we have said repeatedly, the home store has been a disappointment. We don’t think the performance has been any worse than it would have been had we not centralized, but we are not getting the improvement that we had hoped when we made the decision to centralize home. I think in hindsight, the centralization was going to be more difficult to execute with the five different Macy’s marketing calendars; we’re in the process right now of relooking at those processes to help get more of the division by division focus and decision-making and free the merchants up in the central group to do what we really intended for them to do, which is be out in the marketplace to find the best, most exclusive special wonderful products. So, we are hopeful that the results will improve in 2006 although it obviously has taken longer to get better results than what we had anticipated when we centralized.

Okay. And with regards to May, can you provide some additional color in terms of what you think are the drivers with regards to better than expected performance in 2005?

I think when we closed the transaction in late August and we looked at their sales trends, relative to last year and relative to plan and thought about the division consolidations that we were announcing in September, we became very concerned about what that might do to their business in the 4th quarter. And frankly, it’s a tribute to the May divisions and the May organization that they were able to perform better than what we had expected at that time. Remember our expectations were for a comp of down 5-7% and they ended up producing a comp about a tenth above last year. So significantly better. And that’s what really drove most of the improvement. Now a lot of that volume was driven by additional markdowns. But nonetheless, often you can take markdowns and not get the sales. So that’s really it. Unfortunately, that really doesn’t translate into 2006 in terms of better performance. We obviously expected significant improvement in the first half of the year and certainly in the 2nd half of the year. So, while the 4th quarter May results are great in terms of the additional cash flow it provided, it doesn’t really give me greater confidence about 2006.

Okay, great. Thanks so much and congratulations again on a great quarter.

The next question is from Adrian Shapiro with Goldman Sachs.

Thank you. Karen, clearly we’re all expecting clear benefit as Federated leverages its better, best practices merchandising across May, but I’m wondering a key Federated hallmark is the ability to flex expenses when sales come in a bit light, like we saw this quarter. When do you think that best practice could be shared at May?

I think it’ll be shared very rapidly. If you think about it, the four May divisions are being integrated into Macy’s, so that’ll happen very quickly. And, frankly, that’s been a good practice of May as well, I believe. So I think both companies have a tradition of good expense control. So that’s not something I worry about not happening going forward.

Okay. My next question, you had talked about working with consultants kind of culling demographic and psychographic data to match sister May doors to Federated. Can you share with us what you learned and maybe as you more appropriately assort these stores, can you gives us sense percentage-wise how many were under assorted and could clearly benefit from a trading up of assortments?

That’s a hard question to answer quickly. As we look at stores we look at them in terms of what we call their good, better, best, which relates to price points. But also, lifestyle and whether they’re traditional, neo-traditional, contemporary or fashion. And we cluster stores accordingly. So what we had done last summer was to take our view of how the May stores were being assorted currently and how we think it should be realigned going forward, given the demographics and lifestyle characteristics of those markets. And there’s fairly dramatic change within the May stores from good to better and best and from traditional into more of the Neo- kinds of lifestyle looks. So it will be fairly dramatic as we move forward.

Our next question comes from Jeff Stein at Key Bank.

Good morning Karen. I’m wondering if you might share with us what kind of impact the better than expected shrinkage had on the 4th quarter. And would that give you confidence to accrue for shrinkage at a lower rate during 2006 and has that been baked into the guidance?

We’re not quantifying exactly what the impact was, Jeff. Remember it has a big impact in the 4th quarter because it relates to inventory before that. So it is sort of a year end adjustment. And, we do have a low shortage accrual imbedded in our 2006 plan already. I don’t think it’s as low as we ended up producing in ’05 but it’s very close.

Okay. Karen, could you talk a little bit about your ad spending budget. Given the fact that you just hired a new Chief marketing officer and it’s understandable you want to promote this as a brand; do you have any thoughts on ad spending as a percent of sales for the combined companies on a go-forward basis and how that would compare against what Federated had been spending stand-alone?

That’s a tough question to answer Jeff because it’s confused by markets where we have overlapping locations and we will be closing stores. But clearly, we and Anne as well are committed to bringing down marketing as a percent of sales by spending our dollars more efficiently over time. The specific numbers have not yet been decided. And also, shifting more of that advertising into branding and national marketing, as opposed to some of the more traditional ways of advertising for department stores.

Okay. Thank you.

Our next question comes from Dana Cohen, Bank of America.

Good morning Karen. A couple of questions. The first is, can you just remind us how long are these clearance sales going to be going for?

Into…through March into the beginning of April.

The second question is, when are you going to move to the national calendar and then when would be the first debut of the marketing?

Well, for the old Federated divisions, the calendars in 2006 are almost common. So that’s already happening within the old Macy’s divisions. And, starting in September when we relaunch the Macy’s brand name by converting all of the May doors to Macy’s, that’s when those doors also will be incorporated.

So would it be like Labor Day weekend type of promotions would be the beginning of it?

The next weekend. The weekend after that, I believe. I don’t have the calendar in front of me, but it’s around the 9th, 10th.

Okay. And, then the last question, I believe the merchandising week was a couple of weeks ago…it would have been the first time the merchants would have gone to buy for Federated for the May divisions. Any feedback from them in terms of how that went and sort of just how it’s working?

It actually started last November, which was the first buy that we tried to do for the combined company. We’ve had multiple markets since then, primarily in the private brand. I think it’s working well. One of the things that we’re focusing a lot of attention on is trying to bring the new May people that have joined us on board. We had two 2 ½ day sessions here in Cincinnati a couple of weeks ago to bring people in, meet all of our senior managers, hear about what makes Macy’s tick, hear about the four priorities. I think the organizations are working well together, even at this early stage.

Great. Thank you.

The next question comes from Christine Augustine of Bear Stearns.

Thanks. Karen, could you just clarify the logistics for the going out of business sales? Once they’re done, you’ll still have markdowns probably higher than a year ago because there’s inventory at May; the ongoing stores that’s going to get converted. Is that correct?

Separate them into two subjects. In the going out of business, it’s really clearance sales, its clearance sales. In the clearance sale stores those will end on a certain day. For the stores that are not in clearance mode, we will be taking markdowns throughout the spring season to clear and transition the inventories as we Macy-ize them.

Okay. So, once you finish the clearance sale, do you just job out whatever’s left or do you do any sort of consolidation or do you just sort of say, here’s the end date and now we’re shuttering the store?

Yes. I’m sure that the point at the end of time that merchandise goes somewhere.

Okay. Can you comment at all on this potential strike at Macy’s Herald Square?

All I can say is obviously we’re in negotiations and we hope that we can reach an agreeable solution without a strike.

And then just finally on the inventory position at quarter end, I know you mentioned shrink was a big part of your gross margin, but what about the markdown tools that you’ve got? The 20/20 for example? How would you say…is that as you expected fro the year or better than you expected?

20/20 overall has helped sales and has sped turnover and increased gross margin slightly. As a result, we believe in part of 20/20. So I do think the markdown performance is better as a result of 20/20, but that had been assumed in our plan.

Great. Thank you.

The next question comes from Bob Debral with Lehman Brothers.

Hi, good morning Karen. The first question is, on the going out of business sales, is that all going to be incorporated in your markdown assumptions or will there be a lot of vendor support through that process?

First off, they’re not going out of business sales they’re clearance sales. And I don’t think we’ll get vendor support there.

Okay. On the store disposition transactions that you’ve announced so far, will you have any more on the transactions like the Westfield transaction that you swapped stores? Do you expect many of those to take place going forward?

Many swaps?

Yes.

I don’t anticipate any others at this point but, there are still some stores that are not spoken for.

Okay Great. And the final question I have is, on the May inventory, you talked a lot about the Federated store inventory year over year. Can you give us the percentage declines that the May stores were down on receipts at the end of the year?

That’s something…I don’t know that number Bob, I’m sorry.

Okay. Thank, Karen.

The next question comes from Michelle Tan from UBS.

Great. Thanks. Hi Karen. On I guess the consolidation of the back office operations that’s set to kickoff soon, March 1st, can you let us know whether we’re going to get any further clarity on the progress there in terms of headcount reduction?

I do not plan to do that. The truth is it’s all been factored into our guidance for ’06.

Okay. And then also, on the 4th quarter, you gave us the delta between the original guidance and the 274 reported number. Can you give us a little more clarity also on what changed between the 260-265 guidance?

I started to do that and then I though, oh, it will get too complicated. In the 235 to the 265, that first inquiry?

No, the second one so from the 260-265 vs. what you reported at 274.

I’m trying to split it. So that first was a combination of the tax settlement as well as some improvement in May and the Federated improvement. The 260-265 to the actual 274, it was almost entirely May company improvement. Hence the surprise is, we understood Federated and the May company forecasting was different than ours. I’m just glad it went that way.

Okay, thanks. That’s helpful. And then just one final question. On the liquidation sales, can you tell us anything, any surprises so far in terms of disruption at your other locations?

I think it’s been as we expected. Some but not as much as you would think. So really no big surprises at this point.

Okay, great. Thank you very much.

The next question comes from Christine Augustine.

Oh, you know what Karen; could you just explain the share count? If I’m not mistaken I think the guidance was 280 and it was 277. Is it just something to do with options dilution?

Yes.

Was it the May side where you didn’t have as much dilution as you thought or can you clarify that at all?

I don’t know the answer to that, but obviously we knew how many share we had issued as a result of May. So I don’t know.

There are no other questions in cue at this time.

Thank you all very much.