The following tables set forth the computation of basic and diluted earnings per share:

The Company has a defined benefit plan ("Pension Plan") and a defined contribution plan which cover substantially all employees who work 1,000 hours or more in a year. The Company also has a defined benefit supplementary retirement plan which includes benefits, for certain employees, in excess of qualified plan limitations.

In addition, certain retired employees currently are provided with special health care and life insurance benefits ("Postretirement Obligations"). Eligibility requirements for such benefits vary by division and subsidiary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.

The actuarially determined components of the net periodic benefit cost (benefit) are as follows:

During the 39 weeks ended October 30, 2004, the Company adopted FSP 106-2 to reflect the impact of the Act. The effect of the adoption of this position was to reduce the accumulated postretirement benefit obligation by $14 million as of December 31, 2003 and to reduce postretirement benefit cost, primarily through the amortization of the related net actuarial gain, by $1 million and $3 million for the 13 and 39 weeks ended October 30, 2004, respectively. The impact of the adoption of this position on service cost and interest cost was not material.

As of the date of this report, the Company is considering making a voluntary funding contribution to the Pension Plan of $50-$100 million by December 31, 2004.

For purposes of the following discussion, all references to "third quarter of 2004" and "third quarter of 2003" are to the Company's 13-week fiscal periods ended October 30, 2004 and November 1, 2003, respectively, and all references to "2004" and "2003" are to the Company's 39-week fiscal periods ended October 30, 2004 and November 1, 2003, respectively.

The Company is a retail organization operating department stores that sell a wide range of merchandise, including men's, women's and children's apparel and accessories, cosmetics, home furnishings and other consumer goods in 34 states, Puerto Rico and Guam. The highest concentrations of stores are on the west coast, in the southeast and in the northeast. The Company's operations are significantly impacted by competitive pressures from department and specialty stores and all other retail channels, and general consumer-spending levels, including the impact of employment levels.

In 2003, the Company commenced the implementation of a strategy to more fully utilize its Macy's brand. The Company propelled Macy's presence nationwide through successful co-branding with the Company's regional department store nameplates. The co-branding is allowing the Company to magnify the impact of marketing on a nationwide basis, as well as to leverage major events such as the Macy's Thanksgiving Day Parade. Continuing with the Company's strategy to more fully utilize its Macy's brand, the Company plans to convert all of its co-branded regional department stores to the Macy's nameplate in early 2005. Beginning in 2005, the Company will operate coast to coast exclusively under two retail brands - Macy's and Bloomingdale's.

The Company entered 2004 with a continued strategic focus on four key priorities for improving the business over the longer term: differentiating and editing merchandise assortments; simplifying pricing; improving the overall shopping experience; and communicating better with customers through more brand focused and effective marketing. The Company believes that its recent results indicate that these strategies are working and that the customer is responding in a favorable manner.

In early 2004, the Company announced a further step in reinventing its department stores - - the creation of a centralized organization to be responsible for the overall strategy, merchandising and marketing of home-related categories of business in all of its Macy's-branded stores. The centralized operation is expected to accelerate sales in these categories largely by improving and further differentiating the Company's home-related merchandise assortments.

The Company has also taken additional steps to put its strong cash flow to work towards increasing shareholder return, including the increase in the annual cash dividend to $.54 per share in 2004, the increased authorization and current intention to repurchase between $700-$900 million of its common stock in 2004 and the repurchase of $274 million of its 8.5% senior notes due 2010.

As part of the national co-branding and store consolidations, six Macy's stores previously operating in Florida were consolidated into the Burdines-Macy's organization in 2004. As part of the Rich's-Macy's consolidation in Georgia, certain Macy's stores were closed in 2003; however, one location was renovated and partially reopened as a Rich's-Macy's furniture gallery and two locations were renovated and reopened as Bloomingdale's stores.

Net income for the third quarter of 2004 totaled $74 million compared to $67 million for the third quarter of 2003. Net income for the third quarter of 2004 benefited from lower interest expense resulting from the repurchase during the second quarter of 2004 of $274 million of the Company's 8.5% Senior Notes due 2010, and improved operating income, despite higher store closing, centralization and consolidation costs during the third quarter of 2004.

Net sales for the third quarter of 2004, which were negatively impacted by hurricanes in Florida, totaled $3,491 million, up 0.2% compared to net sales of $3,486 million for the third quarter of 2003. On a comparable store basis (sales from stores in operation throughout 2003 and 2004), net sales for the third quarter of 2004 increased 0.4% compared to the third quarter of 2003. In the third quarter of 2004, sales were strongest at Bloomingdale's, Macy's West and Burdines-Macy's. By family of business, sales in the third quarter of 2004 were strongest in handbags, jewelry and cosmetics as well as in children's apparel. Additionally, sales of both men's and women's apparel strengthened in October 2004.

Cost of sales was 60.2% of net sales for the third quarter of 2004, compared to 60.0% for the third quarter of 2003. Included in cost of sales for the third quarter of 2004 were $14 million of markdowns associated with the Macy's home store centralization. These markdowns are related to merchandise that was being sold at Macy's-branded stores that will not continue to be sold following the home store centralization. Merchandise inventories were down 3.3% at the end of the third quarter of 2004 as compared to the third quarter of 2003. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

Selling, general and administrative ("SG&A") expenses were 34.8% of net sales for the third quarter of 2004, compared to 35.0% for the third quarter of 2003. Included in SG&A expenses for the third quarter of 2004 were approximately $22 million of severance, relocation, real estate write-downs and other costs incurred in connection with store closings, the Burdines-Macy's consolidation and the home store centralization. Included in SG&A expenses for the third quarter of 2003 were approximately $29 million of costs incurred in connection with store closings and the Rich's-Macy's consolidation.

Net interest expense was $55 million for the third quarter of 2004, compared to $61 million for the third quarter of 2003 due principally to the effect of the repurchase during the second quarter of 2004 of $274 million of the Company's 8.5% Senior Notes due 2010.

The Company's effective income tax rate of 38.0% for the third quarter of 2004 and 39.8% for the third quarter of 2003 differ from the federal income tax statutory rate of 35.0%, and on a comparative basis, principally because of the effect of state and local income taxes.

Net income for 2004 totaled $249 million, compared to net income of $233 million for 2003. Net income for 2004 reflects strong sales and gross margin performance in 2004, partially offset by the higher interest expense associated with the repurchase of $274 million of the Company's 8.5% senior notes due 2010 and higher store closing, centralization and consolidation costs during 2004.

Net sales for 2004 totaled $10,556 million, compared to net sales of $10,211 million for 2003, an increase of 3.4%. On a comparable store basis (sales from stores in operation throughout 2003 and 2004), net sales also increased 3.4% compared to 2003. In 2004, sales were strongest at Bloomingdale's, Macy's West and Burdines-Macy's. By family of business, sales in 2004 were strongest in women's and men's sportswear, handbags, jewelry and luggage.

Cost of sales was 59.6% of net sales for 2004, compared to 59.9% for 2003. Included in cost of sales for 2004 were $31 million of markdowns associated with the Macy's home store centralization and the Burdines-Macy's consolidation in Florida. These markdowns are primarily related to merchandise that was being sold at Macy's-branded stores that will not continue to be sold following the Burdines-Macy's consolidation and home store centralization. The valuation of department store merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period.

SG&A expenses were 34.4% of net sales for 2004 and 2003. SG&A expenses in 2004 reflect higher pension costs, higher selling-related expenses and higher store closing, centralization and consolidation costs, partially offset by improved bad debt expense. Included in SG&A expenses for 2004 were approximately $55 million of severance, relocation, real estate write-downs, lease-termination and other costs incurred in connection with store closings, the Burdines-Macy's consolidation and the home store centralization. Included in SG&A expenses for 2003 were approximately $47 million of costs incurred in connection with store closings and the Rich's-Macy's consolidation.

Net interest expense was $234 million for 2004, compared to $196 million for 2003. Net interest expense for 2004 includes $59 million of costs associated with the repurchase of $274 million of the Company's 8.5% senior notes due 2010, partially offset by the impact of lower levels of borrowings.

The Company's effective income tax rate of 38.1% for 2004 and 39.7% for 2003 differ from the federal income tax statutory rate of 35.0%, and on a comparative basis, principally because of the effect of state and local income taxes.

The Company's principal sources of liquidity are cash from operations, cash on hand and available credit facilities.

Net cash provided by operating activities in 2004 was $381 million, compared to the $630 million provided in 2003. Cash provided by operating activities in 2003 benefited from lower income tax payments resulting from the use of Fingerhut net operating losses.

Net cash used by investing activities was $324 million for 2004, compared to $356 million for 2003. Investing activities for 2004 included purchases of property and equipment totaling $316 million, capitalized software of $59 million and the $30 million collection on notes receivable. Investing activities for 2003 included purchases of property and equipment totaling $313 million and capitalized software of $46 million. The Company opened four new department stores and one furniture gallery during 2004 and plans to open three additional furniture galleries during the remainder of 2004. The Company's budgeted capital expenditures continue to be approximately $600 million for fiscal year 2004.

Net cash used by the Company for all financing activities was $770 million for 2004, including $364 million of debt repayments, the acquisition of 14.6 million shares of its common stock at an approximate cost of $689 million, the issuance of $138 million of its common stock, primarily related to the exercise of stock options, and $70 million of cash dividends paid. Net cash used by the Company for all financing activities was $763 million for 2003, including the repayment of $450 million of the Company's 8.5% senior notes that were due in 2003 and the acquisition of 13.1 million shares of its common stock at an approximate cost of $485 million.

The debt repaid in 2004 includes the repurchase of $274 million of the Company's 8.5% senior notes due 2010 and $85 million of the Company's 6.79% senior debentures due 2027. Certain holders of the Company's 6.79% senior debentures due 2027 elected to have such debentures repaid on July 15, 2004 at 100% of the principal amount thereof, together with accrued interest to the date of repayment. As of October 30, 2004, the remaining $165 million of 6.79% senior debentures due 2027 is classified as long-term debt.

The Company's board of directors approved additional $750 million authorizations to the Company's existing share repurchase program on February 27, 2004 and July 20, 2004. These new authorizations are additive to the existing repurchase program, which as of October 30, 2004 had approximately $883 million of authorization remaining. The Company currently intends to repurchase between $700-$900 million of its common stock during fiscal year 2004. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors.

On October 21, 2004, the Company's board of directors declared a quarterly dividend of 13.5 cents per share on its common stock. This dividend is payable January 3, 2005 to shareholders of record at the close of business on December 15, 2004.

On May 25, 2004, the aggregate size of the commercial paper conduit programs used to finance the Company's non-proprietary credit card receivables was increased from $700 million to $750 million. On November 4, 2004 and on November 29, 2004, the aggregate size of these programs was increased again. The total borrowing capacity under these programs is currently $850 million.

The Company was party to a 364-Day Credit Agreement, pursuant to which certain financial institutions had provided the Company with a $200 million revolving loan facility which expired June 25, 2004. Based upon an assessment of the Company's liquidity needs, this agreement was not renewed. However, the Company's related $1.2 billion Five-Year Credit Agreement, which expires June 2006, remains effective.

Management believes that, with respect to the Company's current operations, cash on hand and funds from operations, together with its credit facilities and other capital resources, will be sufficient to cover the Company's reasonably foreseeable working capital, capital expenditure and debt service requirements and capital transactions in both the near term and over the longer term. The Company's ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain its liquidity levels. Depending upon conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes.

Management believes the department store business and other retail businesses will continue to consolidate. The Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed through a combination of cash on hand and funds from operations and the possible issuance from time to time of long-term debt or other securities.

As of the date of this report, the Company is exploring various alternatives with respect to its credit card related assets, including the possible purchase of the portion of the Macy's accounts currently owned by GE Capital Consumer Card Co. ("GE Bank"), the possible sale of all or a portion of the Company-owned accounts and related assets or the entry into modified arrangements with GE Bank or another third party with respect thereto.

The Company is assuming that general economic and other conditions and consumer confidence and demand will be such that comparable store sales will be flat to up 1.5 percent in the fourth quarter of the fiscal year, which ends January 29, 2005. The Company expects to achieve earnings per share on a diluted basis of $3.73 to $3.83 in fiscal 2004, including earnings per diluted share of $2.45 to $2.55 for the fourth quarter. For the fourth quarter, this estimate includes store closing and consolidation costs of $22-$24 million, of which a total of $4 million is expected to be recorded in cost of sales as inventory valuation adjustments. In connection with these estimates, the Company is assuming that the gross margin rate will be relatively flat in the fourth quarter compared to 2003. SG&A expense dollars are expected to be up during the fourth quarter, due to the previously mentioned costs and higher pension expenses.

The accuracy of the foregoing assumptions and the resulting forecasts is subject to uncertainties and circumstances beyond the Company's control. Consequently, actual results could differ materially from the forecasted results. See "Other Information" in Item 5 of Part II of this report for a discussion of matters that could cause actual results to vary from the Company's expectations.

The Company's Chief Executive Officer and Chief Financial Officer have carried out, as of October 30, 2004, an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.