Thank you. Good morning, and welcome to the Federated Department Stores call scheduled to discuss our Q1 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. A 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 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 effect the company, including the risks specified in the company’s most recently filed form 10K and form 10Q. We are very pleased with our performance this quarter, and with the fact that the May company integration is right on track. But while we all feel good we also realize that we still have some major integration work ahead of us. During this call this morning, I will talk about the quarter and our thought regarding the rest of the year, and then as always I will open the call for your questions. Our EPS excluding May-related integration costs and inventory valuation adjustments were $0.02 in Q1 as compared to our expected loss of ($0.15 to a loss of $0.05?). Most of the reason for this positive variance related to the transitional issues that were beneficial to the quarter but will not benefit us to the same degree going forward, as I'll discuss in a minute. However, we were pleased with the underlying sales trend in the Macy's stores, which is an important indicator of our performance in…

Thank you, and Karen, thanks for the great update. It's extremely helpful. In terms of the Federated buyers having an impact on the May assortments, I believe you previously stated that, in July and August, we'll start to see the private brands from Federated rolling in to May. How should we think about between now and that time, other changes that we might see on the Federated organization or the May organization from a merchandizing perspective.

There really is not going to be an impact to the private brand assortments coming in, and frankly the major impact will not be felt until Q3, which is what we have said. So the Q2 will continue to be somewhat floppy as we're transitioning the assortments and as the assortments from Q2 were bought by May buyers as they were transitioning last fall so as in Q1 we do expect some disruption in receipt flow. As well as continuing markdowns needing to be taken.

OK, so just from a theoretical perspective, should be expect on the growth side what we saw in the May division in Q1, expect to see that in Q2 as well?

What I said was that in Q2 we could expect the gross margin, excluding the inventory valuation adjustments, to be below last year but not by the same magnitude as in Q1.

Last question, on the systems integration side, you said that you're obviously now planning to have 40% of the credit card piece sold earlier than expected. Can you just walk us through that process and the thinking there?

Well, I mean obviously we're trying to accelerate cash from the assets that we're disposing as quickly as we can. We converted the credit systems, which was frankly on our systems timeframe, in April, which has enabled us to work with Citigroup as well as the regulators to try to accelerate the sale of that part of the portfolio. Previously, we had thought we would sell it all together later into Q2. What it really will do is enable us to liquefy that sooner.

You're welcome. Thanks

Your next question comes from Dana Cohen of Bank of America. Go ahead please.

Good morning, Karen. Can you just give us some sense of buckets of SG&A that will start to happen in Q2, sort of just give us a timeline of what you think the SG&A reductions would be in Q2 and then through the year, just so we have a sense of timing? Then also, can you update us on the strategy for exclusive products?

Yes. That's two different questions. In terms of SG&A, I'm not sure how I can be helpful in Q2. We have already in essence achieved the expense reductions and the division consolidation, the corporate office consolidation, some of the big bucket that we are expecting. But we have to keep people around until the systems are converted and the names are changed. We are at the ongoing level plus the duplicate expense which will come off as we go through Q2.

So maybe middle of Q2 is when you start to see it, accelerating into Q3?

I don't know, but I know we'll see it in Q3. Most of the systems, Dana, don't get converted until July. In essence it's really end of Q2. As I'm sitting here thinking about it. So I suspect it really will be ramping up as we hit Q3 as opposed to midway through the second. Your second question, in terms of the exclusive merchandise, obviously since we've have a call with investors, the Martha Stewart announcement happened, which is an extremely exciting development for the company. It will be in all stores, really appealing to that core customer of ours which will allow the Home Store to really distinguish itself, which as you know has been an important part of that home strategy. Our hope is that we will have other deals like this as we go forward. As you know, differentiating our assortments has been a major component of our success pre-May, and now with May, we think we have many more opportunities to do deals like this. Now I will tell you, the Martha deal is bigger and broader in terms of its reach than most we will be announcing, but we are continuing to focus on this because again, if our assortments are not different and wanted and special, we're going to have a hard time achieving the vision here.

Great. Thanks so much.

Your next question comes from Stacy Turnof of Merrill Lynch. Go ahead, please.

Good morning, Karen. Could you update us in terms of the time of Macy's re-branding? Should it be ready for back to school or the Labor Day weekend? And a follow up to that, which is looking to your advertising strategy as it's relating to that. Any update in terms of reducing May's budget going forward?

The name re-branding will happen September 10-11, that time frame. And there will be lots of marketing and special events and excitement around that. Obviously no details will be provided because we want the surprise factor to help us through that period. But it will be a very exciting couple of weeks in terms of marketing for the Macy's brand. In terms of marketing savings going forward, I think as you all know, in the markets where we overlap, there will be savings and that's been part of the synergy number that we've talked to you about. Beyond that, it is far too early to really know longer-term where our marketing expense will settle. That's obviously something that we are looking at as we try to maximize the Macy's brand.

But there is an opportunity to possibly take that number down?

Absolutely. I mean, remember our focus here is driving comp store sales growth. So that's our number one goal. As you all know, we brought in a woman named Anne McDonald who is our new Chief Marketing Officer and she's been with us now about a month. Obviously, re-looking and examining our strategy as a national Macy's is high on her priority lists. Whether that leads to lower costs or not, I don't know. But I'm pretty optimistic it's going to do great things in terms of driving the business.

Great. Thank you.

Your next question comes from Jeff Stein of Key Bank Capital. Go ahead, please.

Karen, as it relates to your private label program, I'm wondering if you could talk about how quickly you're going to try to convert the former May customer to become a Federated customer. In other words, if you were to take a current Macy's store and a converted store that were pretty much the same demographically, will they have the same percentage of private label and exclusive merchandise in the stores this fall? Or are you going to try to perhaps ramp up a little bit slower in the new stores?

I think probably not this fall, but very soon. And it's just a question of how we could buy last October for these new doors. So I suspect we will probably be a little conservative in our buying for this first go-round, but by next spring I would think it would be pretty close in like doors.

Great. And secondly, your interest expense looks like it was well below expectations in Q1. Any thoughts about resetting your expectations on interest expense for the year? I think you were originally in the $550-600 million range.

I don't think it was far off what we had expected, so I'm not really sure how to answer that, Jeff. I don't see a reason to change it.

Finally, with regard to - you mentioned at the outset, you still have quite a bit of integration work ahead of you. Other than the systems integrations, can you perhaps share with us some of the major hurdles that you have to overcome on the integration this year?

That's a pretty big one. Also, we're converting all of the stores and 'Macy-izing ' them, you know, getting the signs changed etc. and that's a pretty comprehensive program. Then it gets down a lot to the training in terms of sales associates, making sure the May associates understand not only the Federated systems and how to complete POS transactions, but more importantly, how to be good ambassadors for the brand. That's one of the major areas of focus. Then you get to the assortment. You know, just trying to continue to refine our buy location assortment strategy which will be ongoing as we proceed forward.

Got it. Thank you.

I have your next question coming from Christine Augustine of Bear Stearns. Go ahead, please.

Thank you. Hi, Karen. Could you give us the comp inventory and could you just remind me, is $1.6 billion still your capex plan for 2006 and can you give a breakdown just roughly of where that spend is going to go?

The capex budget is $1.6 billion and you know, as we've said, the conversion piece of that that will go away in the future is about $400 million. Beyond that, I don't really have a breakdown in front of me, Christine.

So is the $400 million, it's got to be more than just a signage change though, hasn't it? Are you doing some actual renovations to some of the May stores?

Remember, there were five tiers to what we were calling conversion. Ranging from just changing signs to doing a more complete remodel. And you know, steps in the middle. We've got different levels, again we are completely remodeling some of the stores, we're putting new reinvent initiatives in some of the stores, and in most of the stores - in fact all of the stores - we'll have some level of private label signing and fixturing. But it's a lot of doors!

OK. How about the comp inventory number?

The Federated comp inventory was down versus a year ago. May inventory was way down, but a lot of that reflected the fact that we took inventory out of the stores that were closing. Beyond that it was down as well.

Just to clarify, in Q1, roughly 950 stores were open and you reported sales from all of those stores including the ones that are now closed. Is that correct?

When they go into GOB(?) mode or - I'm sorry, clearance mode - they're not reported in sales.

They're not?

They are in continuing operations, as a net number, but not in sales. So as opposed to Lord & Taylor and Bridal Group, who are in discontinued operations, the clearance store operations are in the continuing operations number.

But not in the top line?

Correct.

Great. Thank you.

Our next question comes from Marian Clemens of Goldman Sachs. Go ahead please.

Hi, Karen, it's Adrian Shapiro. Good morning. You highlighted that you're expecting to see accelerated cash proceeds due to the credit sale and yet we heard no change to guidance in the second half. Shouldn't this perhaps provide some upside potential as we'll be able to be buying back stocks sooner than everyone expected?

That just depends on the timing of all the assets sales. I mean, is May accelerated, is just depends on when for example the real estate deals get closed. So it may or may not accelerate it alone.

OK. In the current guidance, what is currently factored in for buyback?

We're not discussing the timing of the buyback. You know, what we've said is that we expect to start it last in the second or third quarter. But we have not been more specific than that.

Then my question (related to you highlighting you are pleased?) with what's going on at Macy's, you know, encouraging positive underlying trends. We obviously (held applied comp?) and you mentioned averaging at retail up 6%, so should we think that traffic was down by that much? How should we think about that? And how does that compare to prior quarters?

It's really what we have been experiencing for a while, so that's not a new trend. And we're pleased with the tone of business in the Macy's and Bloomingdale stores.

OK. And would you think part of that may be traffic shortfall related to clearance activity away from Macy's?

I don't think so. Because that really hasn't changed.

All right. Thanks, Karen.

The next question comes from Bernard Sosnick of Oppenheimer. Go ahead please.

Karen, the Q1 interest expense if annualized would be about $550 million. Could you review your total expectation for interest and why wouldn't it be coming down if you're going to be getting certain funds earlier than expected?

Well, I mean, there's a lot of things that go into interest expense. And at this point, we think the annual $550-600 is still right. We did expect - and we said this on our call in January - that the interest expense would be higher in the first half of the year. But again, a lot depends on the timing of these asset sales as well as starting the buyback.

OK. Thank you.

Your next question comes from Bob Debral of Lehman Brothers. Go ahead, please.

Hi Karen, good morning. Just a question on the inventory receipt plan, when would you expect to allow the inventory in that you'll be flowing into the May doors? Is it on the books already or in the timing of it from the various vendors?

I'm not sure I understand. There's obviously inventory ongoing into the May doors.

But in terms of, as you re-merchandise and re-assort all those stores, on the inventory number that you had today, how much of it included inventories that you've already received from the vendors that are going to go into, sort of, July and August? Into the May doors?

It'll be in the numbers when we receive the merchandise.

Do you have any idea how much you have already in terms of just the smoothness of the flow of merchandise?

We don't have any now and we're expecting to start pulling in, in July.

OK. On the reinvent stores, has there been the comp on the reinvent stores and the Macy's doors, how many doors do you have now on the core Federated doors that are in the reinvent that have been reinvented already? And how has that comp done?

The comp has been somewhat better. I mean, not hundreds of basis points better, but somewhat better. In this case, we're doing so many other things at the same time it's going to be hard to tell. You know, because the assortments are changing so dramatically, simultaneously. So we do expect them obviously to get a pop through both the reinvent as well as the change in assort.

Just one final question, on the exclusive merchandise, when you go in to re-launch the Macy's nationally in September, about how much of the product do you expect to be exclusive to Macy's versus all the other retailers in the department stores?

The way we look at it, there's exclusive, which can either be private brand or exclusive from the market, and private brand last year for Federated was about 18%, lower for May and even lower for the old Marshall Field stores. So as we go into September, we won't hit the 18% for the total company or the equivalent for the fall season. But we hope we'll be closer. Obviously that's exclusive. We also look at what we call limited distribution products, which will probably be a little bit more than a third of our assortment at that point. And while not exclusive is not in many doors.

OK. Thank you.

Your next question comes from (David Glick?) of Buckingham. Go ahead please. Q - (David Glick?), Buckingham: Good morning, Karen. I was wondering if you could tell us what the transfer rate is from the recently closed doors in malls with duplicate locations and which categories of merchandise are transferring at higher rates and maybe such as cosmetics that have more limited distribution? And how much of your comp guidance for Q2 includes the benefit of a higher transfer rate?

You know something, the transfer rates are all over the board and vary by mall and there's really not a good rule of thumb we can give you. Obviously the areas of benefit are areas like cosmetics, women's shoes, areas where we will be more unique and different in the assortments. And that is in the guidance for Q2, but not to a huge degree. Q - (David Glick?), Buckingham: OK. Also, one final question. Your guidance for the year is up by $0.05, not the full extent of the Q1 upside. Is that due to the changing average share count throughout the year?

Correct. Q - (David Glick?), Buckingham: OK. Thanks a lot.

Thank you.

Your next question comes from Michelle Tan of UBS. Go ahead, please.

Thanks. Hi, Karen. I was just wondering if we could get any more color - I know you guys don't like to talk that much about the sales change on the May side of the business - but you did mention it was towards the lower end of the plan. Can we get a little bit more color around that and in how we should look at when that disruption from the integration starts to wash out? Is it in Q3 where you were really fully buying the assortment?

We hope it's Q3 and we don't think it'll be before that. You know, Q2 could be sloppy, as we've said. Now we've factored that in as we've talked about guidance. And you know, hopefully Q3 will get better, but think about this in a gradual way. I mean, it's not like suddenly Q3 is going to take a huge step forward. You know, this'll take time to get the assortments right.

Right. How about on Q2, you saw the May sales come in towards the lower end of the range for Q1. I mean, does that give you any kind of thoughts as we move into Q2 as to where you would expect them to come out relative to your range?

Well, we've had lots of discussion about where we think they may come out and there's all kinds of arguments in different ways. We ended up very comfortable with the range that we're in, that we said earlier.

OK. Great. Thank you.

Once more, if you would like to ask a question, please press *1 on your touch tone phone. Again, if you would like to ask a question, please press *1. OK, Ms. Hoguet, at this time I'm sure there are no additional questions, ma'am.

Thank you.