ANN INC. (ANN)

ANN 
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ANN INC (ANN)

Q3 2012 Earnings Call

November 28, 2012 8:30 am ET

Executives

Judith Lord - Vice President of Investor Relations

Katherine Lawther Krill - Chief Executive Officer, President and Executive Director

Michael J. Nicholson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Tom Walton - FBR Capital Markets & Co., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Jeff Black - Avondale Partners, LLC, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Jennifer Black

Randal J. Konik - Jefferies & Company, Inc., Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

Marni Shapiro - The Retail Tracker

Dana Lauren Telsey - Telsey Advisory Group LLC

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to ANN INC.'s Third Quarter 2012 Earnings Conference Call. At the request of the company, today's conference call is being recorded. [Operator Instructions] Following the prepared remarks by the company, you will have the opportunity to ask questions.

I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith Lord

Thank you, Marianne. And good morning, everyone. We are very pleased you could join us to review our results for the third quarter of fiscal year 2012. I'm here with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and a brief update on our strategic initiatives, followed by Mike who will discuss our financial results and our outlook. After that, we will open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of November 28, 2012, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

And with that, I will hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone. Thanks for joining us to review ANN INC.'s results for the third quarter of fiscal year 2012.

We are very pleased to report we achieved record EPS results again this quarter. Our performance was driven by positive comps and strong margins at both the Ann Taylor and LOFT brands.

Diluted earnings per share for the quarter was $0.76, excluding the $0.08 benefit outlined in our release. This was an increase of 25% compared with the third quarter of 2011.

Operating income grew to $66.9 million versus $54.7 million in the third quarter of 2011. Net income was $40.7 million versus the $32.3 million last year. It is important to note that operating income and net income both reflected solid double-digit growth, with and without the benefit from gift card and merchandise credit breakage that we recorded in the quarter.

On the top line, total sales for the quarter were $613 million, up 9% from the third quarter last year. Comparable sales for the company rose 6%, on top of an increase of 6% in the third quarter of 2011, and reflected positive comps for both the Ann Taylor and LOFT brands. Gross margin rate reached nearly 58% for the quarter.

Overall, our results demonstrate that both brands continue to win by remaining clearly focused on what's important to our clients: great fashion, excellent quality, outstanding value and a seamless and engaging shopping experience.

We have seen a terrific response to our fall product strategies, resulting in the delivery of positive comps at both brands in each month of the quarter. I would also note that the multichannel results, which include the front-line stores and Internet sales from each brand, were positive at both Ann Taylor and LOFT in every month of the quarter.

During the quarter, we took a major step forward in enhancing the shopping experience for our clients, launching the first phase of our multichannel initiative in early September. This has been an intensive and well-planned strategic initiative. Phase 1 added the capability for our stores to fulfill merchandise orders placed online, and the results have been outstanding. Where previously sales in the online channel had been constrained at times due to a lack of inventory, clients now have seamless access to our full inventory across our store base. Already, this is enabling us to get a better sense of the depth we can offer in our assortment. In fact, in many ways, this is the ultimate depth test.

This initiative also enables us to achieve higher sell-through at stronger gross margin rates. Overall, we believe multichannel is a significant opportunity for us going forward to be better positioned to meet client demand and drive higher sales and profitability for ANN INC.

As we reported in our press release this morning, the launch of our multichannel initiative has significantly changed how we meet client demand through our stores and online. As a result, sales and comps will now be reported for the combined store and online channels. We believe this better reflects how we manage the business and, importantly, provides a more accurate set of financial and operational metrics to assess our performance.

Finally, during the quarter, we entered the Canadian market with the opening of our first store in Toronto. The results have been very positive, as I'll discuss a bit later.

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