Terry Lundgren, Chairman, President and CEO of Macy’s, answers questions about the state of the economy, how Macy’s will deal with it through the Holiday season, the many new initiatives put in place a few years ago and how they are performing, potential new strategies and his vision of Macy’s evolution into the future.

Q: First of all, with the digestion of the May Co. acquisition, and your re-positioning around the “My Macy’s” strategy in early 2008, it appears in the first half of this year that Macy’s is on a positive growth trajectory – and this taking place during the Great Recession that we are still “slogging” out of. Of the “My Macy’s” initiatives, which do you believe to be the one most responsible for your growth? Whose shares are you capturing and/or how much are you increasing transaction size?

A: My Macy’s is all about localizing our merchandise assortment to the customer’s preferences in each store location. This can mean carrying a different range of product sizes from store to store. Or different brands. Or different colors or fabric weights. It means emphasizing contemporary brands and styles in stores where the customer is more contemporary, while also being more traditional in stores where the customer is more traditional. We really are molding our assortments around the customer. She is at the center of our decisions. As you note, we have been outperforming most of our major competitors. And we’re doing it by having the right product in the right place at the right time for each customer. This sounds so elementary, but it really is a complex process that requires a large amount of human intelligence (in our case, a total of 1,600 experienced merchants) based in every local market. We have invested significantly in My Macy’s and we’re seeing the return on that investment. Customers are coming to Macy’s first because they see themselves in our assortments. There is no technology that can tell you what the customer wanted and you didn’t have in stock. Having these experienced merchants in our stores, talking to customers and our best sales associates is the best way to address this opportunity.

Q: How do you view the economy through the Holidays? Do you find it as “unusually uncertain” as Ben Bernanke recently described the economy? And, if so, how promotional are these last two quarters going to be – more, equal or less than last year? And, how do you manage your inventory in such uncertainty?

A: Let me start by noting that we don’t have a crystal ball. We did have a very successful spring season and we have a lot of momentum as we enter the fall season. So we are optimistic. And we think we can be successful in growing sales in 2010 with inventory levels below our growth curve. We are editing our assortments for growth. In particular, My Macy’s gives us the opportunity to reduce a store’s inventory of those goods that do not sell well, even while we are bringing in fresh new receipts of the best-selling goods and those most wanted in a particular store location. We see our promotional levels roughly equivalent to last year. But the key really is to have the right goods for the customer when she walks into a store. We want her to say,” I love this store. Macy’s gets me. This is My Macy’s.” I have consistently said that we do not need our customers to spend more money for us to grow successfully…We just need them to spend more money with us.

Q: You recently appointed Molly Langenstein as EVP of fashion and new business development, including responsibility for procuring lease business opportunities, to fill any “white space” as Jim Sluzewski put it, and referring to specialty businesses, niche categories that take a special expertise, (eg. would be your Sunglass Hut and Motherhood Maternity shops). Could “white space” also refer to less productive space? And, what departments would those be and what product categories would be at the top of the list? Accordingly, since department stores have been losing share in intimates for some time, how would you view leasing space to retail specialty brands like Victoria’s Secret and others? you find it as “unusually uncertain” as Ben Bernanke recently described the economy? And, if so, how promotional are these last two quarters going to be – more, equal or less than last year? And, how do you manage your inventory in such uncertainty?

A: First of all, Molly is very talented and she will be very helpful at identifying “white space” opportunities. We define “white space” as gaps in our assortment – product that the customer wants and expects us to carry but that we might not have today. We fill that white space in a variety of ways. We do it through exclusive arrangements with market brands, in which well-known brand names like Tommy Hilfiger, Ellen Tracy, Kenneth Cole Reaction and Sean John are available only at Macy’s, as well as at the designer’s own specialty stores. We do it by partnering with resources to create something bold and new, as we did with Iconix and Madonna on the new Material Girl juniors brand. We do it through great private brands. A good example of that is the new Slade Wilder private brand we launched this fall in young men’s. These two brand launches, Material Girl and Slade, are going after the young consumer who is currently shopping specialty stores in the mall. Fashion and Value are key requirements for this young consumer and we apparently got both right because we have had an incredible response thus far. In other cases, we do it with leased departments in categories that require specialized expertise, as is the case with Sunglass Hut and Motherhood Maternity. Our goal is to have the best fashion brands, great quality and obvious value for our customer at Macy’s. We have various ways to fill white space, which gives us flexibility in how we innovate to satisfy customer demand.

Q: Conversely, do you see a time when Macy’s might roll out retail specialty stores with your private or exclusive brands as the nameplates – a chain of INC stores for example?

A: Right now, specialty stores are not part of our growth plan. We believe we have much greater growth potential by integrating our department stores with online selling – driving store customers online, and online customers to the stores. Building this omni-channel strategy is an important subject for us now and for the foreseeable future.

Q: It was reported in WWD that 23% of your merchandise revenues come from your exclusive brands and 19% from your private brands. How high do you see both going?

A: Frankly, that’s up to the customer. We believe we have significant upside growth potential for both private brands and exclusive brands with market resources. But we don’t have a specific target in mind. The customer will decide. We will never add a designer brand or celebrity line to our assortment just because it’s exclusive. The product must be right and there must be a long-term vision for the brand with both creative and production talent backing up the vision.

Q: Are you tracking the performance of your “localization” program? Do you have any quantification that you can share?

A: The measure really is in our comp store sales growth versus our competitors. My Macy’s localization really isn’t a “program” or an “initiative.” It is the way we run our company. We track our comp store sales and compare them to our competitors, none of whom have a systematic approach to localization. My Macy’s is our sustainable competitive advantage.

Q: As major retailers including JC Penney, Best Buy, Wal-Mart and your own Bloomingdale’s roll out smaller “neighborhood” freestanding stores to gain closer access to their consumers, and also providing the consumer convenient access, do you have a Macy’s smaller store strategy, particularly since you are perfecting “localization?” program?

A: There really is no such thing as a “typical” Macy’s. We have a handful of stores in the 25,000 to 50,000 square foot range. We have free-standing furniture galleries in the 75,000 square foot range. We have mall stores in the range of 150,000 to 225,000 square feet. We have grand flagship stores with more than a million square feet. And we have a robust e-commerce capability with zero square feet of selling space. The size of a box isn’t the issue. The issue is how you use your assets to deliver what the customer wants.

Q: Speaking of “localization,” what about globalization for Macy’s – where and when?

A: As you know, Bloomingdale’s first international store opened in Dubai this year under a license agreement with a very strong local partner there. We are learning a lot from that experience. At some point in the future, I expect we will take advantage of other opportunities internationally for both Macy’s and Bloomingdale’s. But for the time being, we’re focused on our  existing stores, the Internet, and the omnichannel opportunity.

Q: As you know, many retailers, including your own Bloomingdale’s are opening outlet stores for growth? Is there an outlet business in Macy’s future?

A: Maybe someday. But right now we’re focused on launching this outlet concept at Bloomingdale’s, which we are doing with four stores this fall. Once we have some learnings from the Bloomingdale’s Outlets strategy, we will figure out what’s next on that front.

Q: And, how can one call them “outlets” today when everybody is making “outlet-only” merchandise? Accordingly, what impact is the growth of off-pricers, outlets, value Internet players (eg. Gilt Groupe), as well as all the diffusion or sub-branding being done by designer brands etc., having on your ability to launch, support and price brands? How do you deal with the challenges they present going forward?

A: Well, all of these channels were in business during the first half of 2010 and we had wonderful results and captured market share. I think the more a big, well known brand like Macy’s can personalize the shopping experience the better chance you will have at fending off all forms of competition. Regarding Bloomingdale’s Outlets, we will carry a combination of clearance from Bloomingdale’s stores and online site, as well as merchandise sourced especially for the outlets. We think we can deliver great value with a fashion orientation that’s associated with Bloomingdale’s. At Macy’s, the focus is on strong fashion, great quality and obvious value. Brands are important, and we at Macy’s carry some of the best. But in the end, the product has to be right – on trend and at the right price point. You can’t just slap a brand label on a garment and expect the customer will accept it. The brand has to be genuine, and the goods have to be right. It all comes down to product and people.

Q: Of your considerable initiatives: localization; developing and growing private and exclusive brands; leasing space to compatible retail specialists; marketing Macy’s as a national brand; accelerating your pursuit of e-commerce and elevating the shopping experience; it could be argued that they are all moves away from the traditional “department store” model as we knew it in the last century. Do you agree, and as these strategies and others evolve, give us your vision of what the new model and Macy’s will look like a decade from now?

A: The department store was developed, grew and flourished in the United States in the 19th Century because that’s what the customer wanted. Those department stores that have survived the decades did so by keeping pace with customer needs and preferences. We think of Macy’s today as the Great American Department Store because we have kept alive our heritage while also changing for the future. The department store concept gives us a lot of room to adapt. We learn from our customers every day and we must continue to apply those learnings to evolve our business. We must not be afraid of change. We have to embrace it. At Macy’s, that means continuing to innovate, continuing to test new ideas, and continuing to experiment. Macy’s has survived and thrived for 152 years. By adapting to the current demands of our customers, we can be here 152 years from now if we keep the customer at the center of all decisions. Having one National Macy’s brand name with 800+ locations and capturing customer data from experienced merchants and planning executives about local customer product demand is an entirely new business model for any large scale retailer. Bloomingdale’s does this very well also but we only have 41 stores and we are passionate about knowing who our customer is in each location.

Q: What would be your biggest challenge and impediment to achieving that vision?

A: Anything is possible if we continue to attract, develop and retain the best people. Macy’s and Bloomingdale’s are known for having the best people in retailing at every level. And leveraging this talent is why we are successful today. The talent that fuels My Macy’s is a great case in point. Even with 9% unemployment, there is a war today for the best talent. We have to keep fighting to attract the best and the brightest individuals into the retailing and fashion industries. Macy’s, Inc. is already at or near the top of many of the lists of preferred employers. We cannot become complacent in this regard. Our entire industry must stay focused on our talent needs and do everything we can to attract, retain and grow the best and the brightest.