ANN INC. (ANN)

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AnnTaylor Stores Corp. (ANN)

Q3 2010 Earnings Call Transcript

November 19, 2010 8:00 am ET

Executives

Michael J. Nicholson – EVP, CFO, and Treasurer

Kay Krill – President and CEO

Judy Lord – VP, IR

Analysts

Paul Lejuez – Nomura

Dana Telsey – Telsey Advisory Group

Janet Kloppenburg – JJK Research

Brian Tunick – JP Morgan

Roxanne Meyer – UBS

Jennifer Black – Jennifer Black & Associates

Marni Shapiro – The Retail Tracker

Betty Chen – Wedbush Morgan

Lorraine Hutchinson – Bank of America-Merrill Lynch

Neely Tamminga – Piper Jaffray

Robin Murchinson – SunTrust Robinson Humphrey

Liz Dunn – FBR Capital Markets & Co.

Michelle Tan – Goldman, Sachs & Co.

Kimberly Greenberger – Morgan Stanley

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Ann Taylor Stores Corporation's third quarter 2010 earnings conference call. At the request of the Company, today's conference is being recorded. If you have any objections you may disconnect at this time. Following the prepared remarks for the Company, we will have an opportunity to ask questions.

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

Judy Lord

Thank you, Candy, and good morning, everyone. We're pleased you could join us to review our results for the third quarter and nine months period of fiscal 2010. I am here with Kay Krill, Ann Taylor's President and CEO; and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and our outlook for the balance of the fiscal year, and then Mike will review the financials in more detail. After that we'll open it 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 19, 2010, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that I'd like to hand it over to Kay.

Kay Krill

Good morning, everyone, and thanks for joining us. I am extremely pleased to report this morning on the strong performance for the third quarter, and provide an update on our progress year-to-date and our outlook for the balance of the fiscal year.

Earnings per share for the quarter excluding charges reached $0.42 more than double the year ago period, driven by higher sales and a near record third quarter gross margin rate of over 57%. Net sales for the quarter reached $505 million, up more than 9%. Our double digit comparable sales of approximately 12% represented our third consecutive quarter of positive comps. This strong performance was driven by an exceptional, 22% increase at the Ann Taylor brand, and a solid 5% increase at the LOFT brand.

Looking at the components of our third quarter you will see that the Ann Taylor brand had another standout quarter, showing meaningful gains across all channels. Our momentum continued on the top line with clients responding enthusiastically to the product line and the compelling fashion, quality and value we offer. As a result, we were able to be very strategic in our promotional activity during the quarter with a focus on driving profitable sales growth.

We also showed progress at the LOFT brand, with outstanding performance in the e-commerce and Outlet channels, and steady improvement in the stores channel. As expected, we experienced stronger sales in our stores as we received new product deliveries in September and October.

As you know, at the end of October, we announced plans to accelerate our expansion in our highly productive Factory Outlet channel, by opening approximately 40 new stores at leading Factory Outlet centers in locations formerly occupied by Liz Claiborne. We expect to add approximately 35 LOFT Outlet stores, and 5 Ann Taylor Factory stores in the second quarter of 2011. This is a terrific opportunity for us to accelerate our planned expansion of LOFT Outlet, which has generated 15 consecutive months of positive comp growth.

The new stores are expected to deliver incremental sales of approximately $75 million in 2011 and be accretive to our earnings per share next year. We are also pleased that this opportunity is expected to create approximately 1,000 new jobs across the Country.

From a financial perspective, we remain in excellent shape. Our balance sheet continues to be extremely strong with nearly $225 million in cash at quarter end and no debt.

Let's now take a closer look at each of the brands. First, Ann Taylor.

The Ann Taylor brand delivered strong results in both sales and profitability for the quarter. The comp sales growth of 22% for the brand was driven by double-digit increases in all channels, including a 23% increase in the stores channel, a 57% increase in the online channel, and an 11% increase in the factory channel.

Ann's full price business was especially strong driving a substantially higher gross margin rate for the brand. Conversion was also up, driven by significantly higher DPTs and AURs. We're pleased to note that our client is responding positively to the fashion and outstanding quality of the product.

We also believe a key differentiator has been our compelling opening price points and the tremendous value we are offering. We are pleased to be earning more of our client's spend and we'll continue to focus on expanding our share of her wallet, while marketing to potential clients to drive new interest in the brands.

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