ANN INC. (ANN)

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Ann Taylor Stores Corp. (ANN)

Q2 2010 Earnings Call Transcript

August 20, 2010 8:30 am ET

Executives

Judy Pirro – VP, IR

Kay Krill – President and CEO

Mike Nicholson – EVP, CFO and Treasurer

Analysts

Jennifer Black – Jennifer Black & Associates

Lorraine Hutchinson – BofA/Merrill

Neely Tamminga – Piper Jaffray

Michelle Tan – Goldman Sachs

Brian Tunick – JP Morgan

Roxanne Meyer – UBS

Marni Shapiro – The Retail Tracker

Laura Champine – Cowen

Stacy Pak – SP Research

Sam Panella – Raymond James

Janet Kloppenburg – JJK Research

Dana Telsey – TAG

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Ann Taylor Stores Corporation’s second quarter 2010 earnings conference call. At the request of the company, today’s conference call is being recorded. If you have any objections, you may disconnect at this time. 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 Pirro, Vice President, Investor Relations. Please go ahead.

Judy Pirro

Thank you, Tammy. And good morning, everyone. We are very pleased you could join us to review our results for the second quarter and first half of fiscal 2010. I’m here this morning with Kay Krill, Ann Taylor’s President and CEO, and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and provide an update, and then Mike will review the financials in more detail. 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 August 20, 2010, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, let me hand it over to Kay.

Kay Krill

Good morning, everyone. Thanks for joining us today to hear more about our second quarter and the initiatives we have underway to build on our progress in the second half of the year and beyond. For the second quarter, the company delivered substantially stronger earnings over the second quarter of last year.

Our EPS of $0.32, excluding charges, and our sales and operating margins as well underscore the significant progress we have made over the past year. In fact, our more than five-fold increase in operating profit was driven both by higher sales and a 260 basis point gross margin improvement, reflecting higher full price selling, especially at the Ann Taylor brand. We have also continued to be extremely disciplined in managing our expenses.

Overall, sales for the company increased to approximately $484 million compared to $470 million in the second quarter last year. Total comparable sales increased more than 6%. Our strategy of focusing on delivering top-line growth while maximizing gross margin and carefully managing inventory levels has delivered and continues to deliver strong results.

Our gross margin rate was 55%, a record for a second quarter period, driven by significant improvement at the Ann Taylor brand and a solid performance from LOFT. We have entered the third quarter with clean inventories at levels which we believe position the company for profitable top-line growth in the fall season.

Our balance sheet continues to be exceptionally strong, with more than $260 million in cash at quarter-end. This represents an increase of more than $55 million since the end of the first quarter and approximately double the cash that we had at quarter-end a year ago. And we have no debt.

We continue to look at ways to use our strong balance sheet and free cash flow to further enhance shareholder value. To that end, I’m pleased to report that our Board has voted to expand our existing share repurchase authorization to $400 million. We now have approximately $260 million currently available under this authorization to repurchase our shares.

Now let’s turn to the brands. Ann Taylor. The Ann Taylor achieved outstanding results, as the earlier momentum continued to accelerate throughout the quarter. Comparable sales for the brand increased more than 15%. By channel, this includes a 20% increase at Ann Taylor stores, a 29% increase in the online business, and a more than 6% increase in our factory stores. Notably, the comparable sales trend for the brand became stronger each month over the course of the quarter.

Importantly, the brand’s gross margin rate was also significantly higher across all three channels, reflecting strong full price sales. In fact, all of our comp growth at the Ann Taylor brand was driven by full price sales. And our gross margin comp once again dramatically outpaced our sales performance due to the strength of the full price offering.

We were pleased that our merchandise offerings were compelling and drove further purchase in spite of the competition on price available to her. Clearly, our client continues to demonstrate a strong desire for our feminine and versatile fashion that is the hallmark of the iconic Ann Taylor brand.

Turning to products, our go-to-work category that includes suiting, separates and dresses, performed exceptionally well. And in tops, momentum in cardigans, knits and wovens continued. Jewelry remains a standout. From a marketing perspective, our team has continued its heightened focus on getting the word out about the new Ann, and we are seeing the results.

As you know, we have been utilizing a multi-touch, but cost-effective strategy to highlight the new design aesthetic, generate greater overall buzz for the brand, and drive traffic in store and online. As a result, we have seen good success in re-engaging lapsed clients, attracting new customers, and driving the overall momentum of the business.

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