"The economic environment is feeling more challenging than wehad anticipated in the first part of the year," Hoguet says. Weakapparel sales and increased markdowns also hurt margins, while aneconomic slowdown in Florida hurt Macy's performance in thatregion, she says.

However, the end of the second quarter saw improvements in thecompany's home and furniture departments, and its luxuryBloomingdales stores continue to perform well. Stores acquired bythe retailer from May Department Stores two years ago are alsoperforming better, she says. "The upscale customer segment appearsstill appears to be strong," Hoguet says. "We are feeling betterabout our home business than we have for a while."

Management predicts that same-store sales will come in between a1% drop and a 1% gain during the third quarter and forecasts aflat-to-2% gain in the fourth quarter. Total Q3 sales are seenbetween $5.9 billion and $6 billion, and in the fourth quarter,from $8.8 billion to $9 billion.