Good morning and welcome to the Macy’s fourth quarter Earnings Call. This call is being recorded. I would now like to turn the call over to your host, Karen Hoguet. Please go ahead.

Thank you. Good morning and welcome to the Macy’s call. I am Karen Hoguet, CFO of the company. Any transcription or other reproduction of the statements made in this call without our consent is prohibited. A replay of the call will be available on our website, www.macysinc.com, beginning approximately two hours after the call concludes. Please refer to the investor relations section of our website for discussions 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 Form 10-Q. We had hoped for better sales performance in the fourth quarter. But we, like others, were impacted by the weak macro economic environment. Our comp store sales declined 2% in the fourth quarter, which represented the low end of our guidance. Total sales in the quarter were $8.6 billion, 6.2% below last year due to one last week in the quarter this year, the comp-store sales declined, as well as closed store. And while disappointing, our sales performance compared well to our peers in the quarter, giving us comfort that our strategies are appropriate and our execution is on track. We were pleased with our earnings, excluding integration cost of $1.83 in the quarter, given the sales performance. Recurring gross margin in the fourth quarter was 41.6%, up 70 basis points versus last year. Remember, we had told you when we released our second quarter earnings that due to the calendar, we expected a lower gross margin rate in the third quarter and a higher rate in the…

(Operators Instructions) We’ll go first to Adrianne Shapira with Goldman Sachs.

Thank you. Karen, just following on your comments on your comp plans. Could you share with us, how you are planning inventory in terms of the first half versus the second half?

Obviously, we are planning inventory consistent with the sales, and as I said, we expected our comp store sales in the first half of the year, particularly the first quarter, to be weakest and get progressively better.

Obviously, you are heading into the first half clean in terms of inventory, but where we do hope to end inventory given the fact that comps are going to be weaker in the first half?

What we do, Adrianne, is we focus on receipts by family of business by items, so we really have a very good forecasting process. I am sure there are some areas where we might be heavy. But overall, we feel very good about our ability to adjust our inventory receipts to what’s happening on the sales line.

Okay, thanks. And then just Karen, could you give us any progression of the $100 million in cost savings?

That's for 2009. In 2008, we had said we were going to save $60 million, and most of that will come in the back half of the year.

Okay. Then just lastly on the May out-performance, could you give us any more color in terms of regions, categories what you are seeing, what signs of strength are you seeing?

Obviously, at this point we’re really no longer breaking out May versus Macy doors because the truth is that performance now is so mixed. There are some very good performing markets within May. Dallas and Houston for example. And so, at this point we’re just not going to be talking about it anymore.

Thank you.

We'll go next to Mitchell Clark with Morgan Stanley.

Good morning. Karen, first question what would gross margin have been the rate of improvement in the fourth quarter excluding the favorable impact of the calendar shift?

As we said with the third quarter, we really can't quantify it. But clearly there was a factor there and in fact the third quarter margins were down.

Okay.

And it's not all of the improvement, Mitchell.

Right, it’s part of that. Even excluding that you would still have seen improvement in the gross margin rate?

Correct.

Okay. And then the second question, you had mentioned that, you are more concerned about the economy following January and February. What gives you conviction that you will see improvement in the consumer environment in the back half for the year?

I am not sure, I used the word conviction.

Okay.

I think like all of you, we really don't know, and again we've got people looking at this, we're reading, we think there will be some improvement as we get through the third quarter and into the fourth. And, obviously we're watching very closely.

Okay. And then just one last question, Karen, your thoughts on retaining your investments grade credit rating?

Well I think in times like this particularly, but always we try to retain access to all of the capital markets. And we think investment grade does help us do that. So, obviously, we’re always balancing factors, but we would like to maintain that rating.

Okay. Great. Thank you.

We'll go next to Charles Grom with JPMorgan Chase.

Thanks. Good morning, Karen. Could you provide a little bit more color on your decision, I think, in mid December to close the nine stores? We noticed that a couple were only open, I think, four or five years, which is surprising? And I guess second follow-up to that is it possible that there will be more closings as ’08 progresses, or are we done with the nine for this year?

Well, every year we are constantly reviewing stores that aren't performing well. And you'll notice that every year we closed a couple of stores, that’s nothing new. There were few more this year, largely because we had given the May stores a year before we made a decision to close them. So, we will always close the couple of stores every year. But I don’t expect a large number of closings, and certainly not in the near future.

Okay. And then just on CapEx, like you said roughly $100 million larger than your guidance, but your '08 outlook is back up to $1.1 billion. And I guess my question is, why is it going up in '09? And can you give us a little bit of color on mix between new stores, remodels, technology etcetera?

What we suggested is it, in ‘08; our guidance is for $1 billion.

Okay. So --

But I am not sure what --

Okay, so it is roughly in line then?

Yes.

Okay. And then just on mix in terms of new stores renovations?

You know I don't have the number in front of me but it won't change materially from where it was in our last three-year plan which is in our FACS book.

Okay. And then, just last on the merger and integration line, $69 million, specifically, where would these costs have fallen in the P&L had you not broken them? Is it more in SG&A than COGS?

It's all SG&A because had it been in margin, it would have been that lot.

Okay. Alright, thanks.

We'll go next to Dana Cohen with Banc of America Securities.

Hey, Karen, couple of questions. Going back to the fourth quarter, you missed the middle of your original range lets say by $0.07 or something. How much of that was in gross margin and how much of that was in SG&A? I sort of thought the gross margin would have been a lot weaker coming into today. So can you just help us out as to where versus your plan it came in?

Yeah, I can't really give you where it would have been with the guidance because, when we give guidance, we look at multiple scenarios that could happen that way.

But it wasn't sales?

As I said Dana, we were pleased with the gross margin given the sales. So, I think we are saying the same thing that you are saying, which is that we were pleased. Had the sales been stronger though I would have expected a stronger gross margin.

So it really had to have been then on the SG&A side really?

What on the SG&A side?

The shortfall in terms of the earnings.

Not in terms of dollars, in terms of rates.

Right but your comps didn't come in below your plan. So I am just struggling, given that it's not a sales issue versus your original plan?

Well, it is all kinds of different scenarios for getting there, but I don't really know how to answer the question. Sorry.

Okay. It sounds like even versus where you were a few weeks ago when you said the guidance for the year, things continue to be more challenging than you would have expected. I mean, help us to understand how you now think the year will progress? It sounds like you're pushing a bit into the back half?

Dana, I wish I had a crystal ball.

So do we all.

The only good thing I can tell you is, if you think about months in a retail year, if you're going to have weakness, January and February are pretty good months to have weakness.

Okay.

So, I really don't know anymore than you do and that's why we are trying to be flexible.

Okay. And then lastly on credit, obviously, you don't own it anymore but it does flow through. I mean it sounded like last quarter you were very pleased with credit in terms of penetration and what was going on there. Can you just give us an update?

Yeah, I mean from a penetration perspective, we feel very good about credit. For the year 2007, our penetration was almost 46% which was up 230 basis points over last year. So we feel very good about the card, we feel very good that the marketing relating to the card is working well. And so much of our economics today is based on credit sales. So that's a good thing. Obviously like others were concerned about bad debt because we don't own the portfolio, it doesn't impact us as directly as it would if we still owned the credit. But like others, we too are concerned about bad debt and delinquency.

And are you seeing that start to creep up?

No, it started creeping up in the third quarter. And we really haven't seen anything since then in terms of further creep.

Okay. So, it's about where it was tracking in Q3?

Correct.

Great, thank you.

We'll go next to Christine Augustine with Bear Stearns.

Thanks. Hi, Karen.

Hi, Christine.

I have two questions. The first is, in your sales assumption for '08, how much disruption, if any, from the divisional consolidation are you anticipating in the sales? And my second question is, when you start to anniversary, the more intense promotions, I think it’s May-June that you cycle those; what is the plan as you come around that reset of promotions? Thank you.

Well, the reset of promotion wasn't really a reset. We still have fewer coupon days in '07 than we did in '06. It was just more than what we had expected. So, there is not a major increase in promotional activity that we're concerned about year round for this year, which is I think what you're implying.

Yes, I thought that you step that up?

Stepped it up versus what we had expected to do, not versus the prior year.

Do you think you have to step-up then again just given what's going on with the consumer?

No, because we're planning to not reduce it this year or to that extent we might have otherwise given what's happening with the consumer. So, we are planning a similar promotional environment this year as last year. We might have hoped a year ago to be reducing it, but we don't think this is the environment in which to do that.

Okay.

When you asked for your first question about disruption, we are not planning any disruption in those geographies, in-part that's what this new structure is intended to fight against as well as the additional investment in selling in those regions.

Okay.

We'll go next to Liz Dunn with Thomas Weisel Partners.

Hi, good morning.

Good morning.

I was thinking about the decision to suspend the share repurchase until the environment improves. Are you talking about a return to positive comps or what exactly will you be looking for to return to repurchasing stock?

I can't really give you a specific number on that, but given the uncertainty in the environment and given the fact that so much of our cash flow comes in the back half of the year, we just have to be confident about what's going to happen in the back half of the year, before I'd want to buyback any significant amount of stock. So I don't know how to give you a specific number on that.

Okay and then just a follow-up to Christine’s question. Are you able breakout how much you’re reinvesting? Obviously, there are savings and there is reinvestment in selling and then also these 250 positions. Can you give us any visibility in terms of how much the reinvestment is?

NO, what we’ve said is that the net will be a savings of $60 million this year and a $100 million next year.

Okay, thank you.

We’ll go next to Jeff Stein with [Stein] Research. Jeff Stein – Stein Research: First of all Karen, just a clarification on that last answer, the $60 million and $100 million, are those both incremental numbers, or is it $100 million run rate capturing $60 million of that $100 million this year?

The $100 million run rate capturing $60 this year. Jeff Stein – Stein Research: Got it, okay. And secondly, you’ve talked earlier about your long-term targets, 14% to 15% EBITDA margin, 2% comp growth. I'm wondering, can you get to a 14% to 15% EBITDA margin with just a 2% kind of trend line comp growth rate?

Again, we said 2% plus and I do think we can get there with the 2% comp, it will just take a little longer. Jeff Stein – Stein Research: Okay. And final question, can you tell us a little bit about the sales level you achieved in your direct marketing business in 2007? And you did allude to the fact that you have been investing in that business. Will the higher level of investment continue in 2008?

Yeah. This past year we opened a facility in Portland, Tennessee, and in '08 we’ll be opening another facility outside of Phoenix in Goodyear, Arizona. So, that investment will continue also in systems and improving the customer experience etcetera. Obviously, it’s the fastest growing part of our business. So for example, we went to cut CapEx, it did not make an impact on that investment. So we do expect to continue to invest in that business. Jeff Stein – Stein Research: And can you just tell us what the level of sales you achieved in that?

Yes. Sorry about that. We are on track, this year in '08 we had talked about doing over $1 billion in our online businesses and we are on track to do that. Jeff Stein – Stein Research: Got it. Okay, thank you.

We’ll go next to Robert Drbul with Lehman Brothers.

Hi, Karen.

Hi, Bob.

Two questions I guess, the first one is, and you talked about couponing levels. But can you talk about the advertising expense that you incurred in the fourth quarter and then how you are thinking about it for 2008?

Yeah, I think you will find that advertising expense for 2007 as a whole, I can't speak to the fourth quarter, was up just slightly. And my suspicion is, we will keep it flattish in 2008, again, reflecting the environment that we are in.

Okay. And then on the private label, can you maybe address a little bit the sourcing costs and if you are seeing any pressures overseas in terms of what's happening there?

We are beginning to see some pressures and thank goodness, we have a fabulous overseas organization, it’s all over this issue and trying to move production around and manage the process such that the customer won’t see those increases. But we are watching it closely.

Okay, thank you very much.

We will go next to Tino Jang with Citi. Deborah Weinswig – Citigroup: Hi, it’s actually Deborah Weinswig. So, Karen, you referred to the recently announced division consolidation launch of the localization initiative. Can you elaborate on what we might see with regards to more localized marketing and merchandising, and when should we see these results, and also are there systems upgrades or enhancements that are helping with the localization initiative or is it more of a change in processes and people on the field?

Well, there are systems that are being rolled out through all of the Macy’s division this year to help us better allocate assortments, as well as, do better assortment planning. Without those systems we wouldn’t be able to do the restructuring, so it’s facilitating it. But that was on track to be put into use this year in any event. So, yes, this technology is working with the restructuring. In terms of when we are going to began to see impact, my hope is that you will see small changes this fall. But my guess is any major impact on assortments really won’t happen until next spring. Just given these organizations won’t be in place until the second quarter of this year.

Okay and then with regards to your real estate strategy going forward; one, should we expect more source to be of-mall going forward, and then also you alluded to expanding Bloomingdale’s more aggressively. Can you please provide some more additional color on that?

Sure. I think the reality of mall construction is such that more of our new stores will be in lifestyle centers as opposed to traditional malls. Not because we don’t want to be in traditional malls, but because there aren’t as many of those being built. So, we will do both, but I think most of our new stores are going to be in more of the open air lifestyle centers. In terms of Bloomingdale's, we are obviously looking for real estate sites across the country that we think fit with where Bloomingdale's would do best. There aren't 100 of these sites, but there are some and we are aggressively trying to find them, and get deals going.

And then last question, I was especially impressed that your gross margin performance in the quarter, especially compared to your peers who reported so far, can you talk about the processes and procedures that kind of you took in terms of an approach in fourth quarter and maybe how that kind of translates into what we'll see for '08 as well?

It is hard for me to compare to our competitors because I candidly don't know what they do. But our merchants stay very close to sales trend and are constantly moving receipts relative to sales and it seems to have paid off up quite well in the fourth quarter.

Okay. Well, congratulations in a tough environment and best of luck in '08.

Thank you.

We'll go next to Uta Werner with Sanford Bernstein.

Thank you. Good morning Karen. I've a question, first of all related to new store openings. I wondered if you could tell us a little about the number for the year, how the mix is between Bloomingdale's and Macy's and maybe from which regions do you see them coming? I also wondered about the temporary closings when we might expect those to open up again.

Okay. If I look at 2007, we will have opened 12 new stores and of those 2 were Bloomingdale's. In '08, I believe we are going to open 5 new stores and none of those are Bloomingdale's.

Okay. My second question relates to the credit card business. You mentioned that while you are not directly exposed to bad debt, you indirectly are. Could you comment a little bit about the magnitude of the EBIT stream coming from the credit card and the range within, which we might see fluctuations to the extent you can?

No, we really don't break that out, sorry.

Thank you.

You're welcome.

(Operator Instructions). We'll go next to Michelle Tan with UBS.

Great, thanks. Most of my questions have already been asked, but I just had a few. You mentioned concern over sales trends in January and February, is it possible that you share with us any color on how February looks so far relative to January?

Yeah, I mean early February was weak as we've gotten through Valentine's Day, President's Day, business looks better.

Okay.

And some of the spring fashions are selling. I am happy to report that [Inc.] which had a tough year last year on one of our major ready-to-wear brands, is on fire again which at least indicates to us when you have newness and you have fashion, it does sell even in these economic environments. But we'll have to see so, slightly more encouraged by the end of February than the beginning, but I think it's going to be a rocky year.

Okay, great. And then, as far as the online business goes, anything you can share on where the profitability is on that business and at what point you start to leverage these incremental investments that you are doing to drive growth?

It's profitable already.

Okay. Any magnitude relative to retail?

No, I mean it's a good business and it's all related to retail because we do so many things that, for example, the bridal business, how do you allocate the profits between the two. But it is a profitable business for us already.

Okay, great. And is it leveraging now with your additional investments relative to the growth or --?

There are start-up costs and that's one of the things I had alluded to in the fourth quarter.

Right.

As you make the systems investments and bring the warehouses on-stream.

Okay. And then I guess just finally on the SG&A overall, you mentioned that you leveraged from the sales decline being the biggest piece of the SG&A increase. It does seem like a significant increase on a down two comp. Can you give us color on how much of it also came from the 53rd week last year, now being in the base this year and then also the store closings?

The SG&A was below last year.

No, I know. I guess I am saying, when you look at the rate being up 140 basis points.

I'm sorry. I thought you meant dollars, I apologize.

No.

-- a piece of it, too. But it is very hard in this business to lever expenses when you've got a negative comp.

No, alright. I guess it's just surprising, 140 basis points. I guess any kind of incremental breakout you can give us specifically on how much was de-leveraged on the comp?

It's hard to do that. I am sorry.

Okay, that's fine. Thanks for the help.

You bet.

It appears there are no further questions at this time.

Great. Well, thank you all very much.

That does conclude today's conference. We thank you for your participation. And you may now disconnect.